Mumbai: India’s most valuable company, Reliance Industries Ltd (RIL) has acquired its third shale gas asset in the US in a span of five months, increasing its bet on a new though untested source of energy that has attracted many global energy giants such as BP and Exxon.
The $392 million (Rs1,811 crore) deal takes the total investment made by the Mukesh Ambani-controlled company in shale gas to $3.44 billion for a potential 25.4 trillion cu. ft (tcf) of natural gas trapped in shale rock.
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RIL said on Thursday that it has entered into an agreement to acquire a majority stake in the shale gas asset in the Marcellus field jointly owned by US-based, Nasdaq-listed Carrizo Oil and Gas Inc. and private equity firm Avista Capital Partners.
RIL said the equity interest is for Carrizo’s shale acreage in the high-potential Marcellus fields in central and northeast Pennsylvania. This is the 11th major shale gas deal in the Marcellus area since 2008, and the second by RIL.
This is the first time RIL will have majority control in a US shale gas asset.
Analysts said that RIL’s recent investments give it access to both gas acerage as well as technology knowhow. “The current acquisition reflects the strategic importance of shale gas assets to a global energy giant such as Reliance. It provides scale to their existing shale gas acreage portfolio in the US and also allows them access to technology and operator experience, which they can bring to India,” said Probir Rao, managing director and head of investment banking and capital markets-India, Jefferies India Pvt. Ltd.
The acreage is currently held through a 50:50 joint venture (JV) between ACP II Marcellus Llc, an affiliate of Avista Capital Partners, and Carrizo. RIL said the company would buy out Avista’s holding and a fifth of Carrizo’s interest in the JV through a US subsidiary.
“Upon completion of the transaction, Reliance and Carrizo will own 60% and 40% interests, respectively, in a newly formed joint venture between the companies,” the statement said.
The transaction is expected to close by mid-September.
RIL will pay $340 million in cash for the stake in the shale gas asset, and will invest the remainder towards drilling costs in the area over a two-year development programme that would cover 75% of Carrizo’s share of drilling costs.
RIL shares fell 0.88% on Thursday to close at Rs1,006.95, while the Sensex shed 0.24%.
Jefferies and Co. Inc. acted as RIL’s lead financial advisor, while Vinson and Elkins Llp was legal counsel. BNP Paribas and Credit Agricole Corporate and Investment Bank provided strategic advice to RIL.
Pursuant to the deal, RIL will control around 62,600 of the 104,400 acres of undeveloped leasehold area belonging to Carrizo. According to the statement, the area has a net resource potential of about 3.4 tcf equivalent of gas, with RIL having a share of 2 tcf. The transaction allows for additional growth in the development acreage, at pre-agreed terms.
“The proposed joint venture will supplement strengths achieved through our recent joint ventures and further expand our footprint in North American shale gas operations,” said Walter Van De Vijver, president (international exploration and production business) at RIL.
This is RIL’s third shale gas asset acquisition in the US and its second in the Marcellus field. In April, it acquired a 40% stake in Atlas Energy Inc.’s core shale acreage in Marcellus for $1.7 billion. In June, it paid $1.35 billion for a 45% stake in Pioneer Natural Resources Co., another US-based energy firm that holds shale gas assets in the Eagle Ford Shale acreage.
Shale is an unconventional source of natural gas that is trapped in fine-grained sedimentary rocks.
The valuation per acre paid by RIL for acquiring a stake from Carrizo is, at $6,200 per acre, less than the $14,000 per acre it paid for Atlas’ asset in the same basin.
Alok Deshpande, an analyst at Elara Capital India Pvt. Ltd, explained that the two assets may be in the same region, but might be in different stages of development.
“The Marcellus region comprises 63 million acres, out of which Carrizo controls only 100,000 acres. It appears that Carrizo’s fields are in a relatively early stage of development than that of Atlas and hence contain greater risk, which would explain a lower valuation,” he said.
RIL’s strategy, say analysts, is to invest in such assets abroad and acquire the necessary technology and expertise that will allow them to develop shale gas in India whenever the government invites bids to licence out blocks with such potential.
“While they enjoy returns as a financial investor in the US at present, RIL can leverage the technological access that such acquisitions provide to produce shale gas in India,” said Arvind Mahajan, executive director at international audit and consulting firm, KPMG.
Graphic by Paras Jain/Mint