Indian companies rush to buy US shale gas assets

Indian companies rush to buy US shale gas assets

Mumbai: With the stock of significant shale gas assets in the US in need of equity partners likely to run out in the next 18-24 months, Indian oil and gas companies are rushing to acquire stakes in them ahead of global competitors, investment bankers and analysts say.

Also, as the supply of such assets diminishes and most of them near actual production, the prices at which they are available are set to rise, according to experts.

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“We are in discussions with at least four to five leading Indian players who have expressed a strong interest in US shale gas assets," said Probir Rao, head of India investment banking and capital markets at Jefferies India Pvt. Ltd.

The US-based investment bank was one of the first matchmakers in the US shale gas space, pairing companies in need of capital to fund drilling work and those that had the money to invest. Of the 20 deals announced in this space since 2008, Jefferies has worked on eight, advising the buyer on some and the seller in others, Rao said, valuing the deals closed by his firm at “over $70 billion (Rs 3.10 trillion)".

A sense of the heightening global interest for shale assets in the US can be got from industry estimates pegging the value of shale gas deals announced in the first half of 2010 at a minimum $62 billion, more than the combined total for 2008 and 2009. Of the top 25 deals in the exploration and production space globally in 2009, 16 were shale gas deals, according to Rao.

“As stakes in exploration acreages get consolidated over the next 18 to 24 months, this high level of activity will taper off as most players who have an interest would have bid for the prime assets in the market," Rao said. The total capital required to bring these “plays" into production hovers in the range of $1.5 trillion.

Reliance Industries Ltd (RIL), India’s most valuable company by market capitalization and the most active in snapping up shale gas assets in the US, has already acquired stakes in three assets in the US at an aggregate consideration of around $3.44 billion. Jefferies advised RIL on two of the deals.

Though talks for a fourth acquisition in Chesapeake Energy Inc.’s shale gas acreage in the Eagle Ford region of south Texas were reported to have ended, RIL is unlikely to give up its pursuit for a good shale asset just yet.

A person familiar with the development said that talks with respect to Chesapeake’s asset didn’t progress due to differing opinions on the valuation, but RIL was “unlikely to stop looking further". He did not want to be identified.

Also, analysts stated that Indian companies may want to pick up stakes in such assets before valuations shoot up with acreages heading toward production.

“There is certainly a rush among Indian companies to acquire something in the US. Acreages that are available at $6,000-10,000 per acre at present could cost as much as $25,000-30,000 three-four years later when shale gas becomes a resource with proven technology, which many companies can find expensive," said Alok Deshpande, analyst at Elara Capital India Pvt. Ltd.

Apart from RIL, state-run companies such as Bharat Petroleum Corp. Ltd, Indian Oil Corp. Ltd and ONGC Videsh Ltd have also expressed their keenness to invest in US shale gas assets.

“Given the high level of interest of our clients, we think there would be continued Indian interest for M&As (mergers and acquisitions) in this sector," Rao said.

Bill Holland, associate editor of Gas Daily, a publication from energy research firm Platts, says the rush on the part of Indian companies to acquire shale assets in the US is driven by the intention to master the technology and transfer it home, before the Indian government auctions shale leases in August 2011, and make a decent profit while doing so.

“The universe of US shale plays is yet to reach its limits. So there isn’t a rush to get into a dwindling stock of shale assets in the US. Any rush on the part of Indian to quickly learn how to identify and exploit these opportunities."

The attraction for Indian firms also lies in the returns from such an investment.

“Shale gas investment is also a very attractive financial investment with some of the good assets potentially realising more than 25% IRR (internal rate of return)," Rao said.