After picking up 40 per cent interest in the Marcellus shale gas acreage of Atlas Energy in April, Reliance Industries Ltd (RIL) on Thursday announced a $1.3-billion (Rs 6,000 crore) acquisition of 45 per cent interest in the Eagle Ford shale acreage of Pioneer Natural Resources. This is its second acquisition in two months in US shale gas assets, the former nearer the east coast and the latter in Texas.
Though RIL was already present in the unconventional gas business in India through its interest in coal bed methane, it is quickly building a portfolio of new age and unconventional hydrocarbon resources abroad with the two acquisitions.
Pioneer has about 310,000 acres of shale gas plays in the Eagle Ford region. Being the operator, it had the controlling 84 per cent interest; its partner, Newpek LLC, has 16 per cent. Both companies will now offload 45 per cent of their respective working interests in the acreage to RIL.
The deal has been done through a RIL subsidiary, Reliance Eagle Upstream. Under the new arrangement, Reliance will have 45 per cent share in the acreage, Pioneer 46 per cent, with Newpek holding the remaining 9 per cent. Reliance has agreed to upfront pay $266 million in cash to Pioneer and to also pay an additional $879 million to carry Pioneer's share of future drilling costs over the next four to six years.
As part of the deal, Reliance will also be paying Newpek approximately $210 million for buying its stake. It will also share Newpek’s future drilling costs, by paying it $173 million over the same four to six-year timeframe.
The shale gas business in the US was primarily dominated by small companies. However, over the past year, it has seen a spate of acquisitions by big companies. Royal Dutch Shell acquired East Resources’ shale gas interest in the US for $4.7 billion this May, while Exxon Mobil bought XTO for $30 billion last year. Similar acquisitions were made by Statoil and BG.
Manisha Girotra, managing director and chairman of UBS, one of RIL’s financial advisors in the deal, said: “In the shale gas space, the way to go forward is through a string-of-pearls acquisitions — a multiple of small to relatively midsize buys, as that’s what is available. This (Eagle Ford) is one of the biggest assets in the US... And, a JV (joint venture) route is a clever way to keep the management team intact and imbibe their existing expertise.”
RIL executives said all the discovered oil and gas assets in conventional sand formations were already taken up by global players. So, while RIL will focus on new discoveries, like the one it did in the Krishna-Godavari (KG) Basin in 2001, the focus will increase towards shale and other unconventional energy sources. Power, with fixed annuity return, will also play a significant role in RIL’s energy portfolio.
“RIL is clearly building its economies of scale in shale gas,” said Vandana Hari, Asia news director at Platts, the energy watch agency. “Its part of a bigger strategy. They have heft in India but now want to grow overseas… And, shale is the hydrocarbon story of the decade. If you move in early in the most developed market and build scale, then you have tremendous early mover advantage.”
Shale gas is natural gas stored in organic-rich sedimentary rocks. It is considered an unconventional source, as the gas may be attached to organic matter. The gas is contained in difficult-to produce reservoirs that require special completion, stimulation or production techniques to achieve economic production. It accounts for between 15 per cent and 20 per cent of US gas production but is expected to quadruple in coming years, triggering a scramble among producers, large and small, for access to resources.
“For a late starter of gas exploration like RIL, the opportunities are limited. The prolific gas fields are already taken. Shale is a new opportunity that RIL will not like to miss out on,” said Anish De, CEO Asia of Mercados Energy Markets International, an oil and gas consulting company.
There are other reasons, too, for this subtle but significant review in strategy. RIL insiders said after the big-bang discovery of KG-D6, success has been moderate. The risk perception towards traditional exploration and production activities has gone up. “There have been cases of dry wells across the east coast. Its part of the risk that every player faces. That also means there is no guarantee of 100 per cent strike rate for anybody, including RIL,” said a company official, on condition of anonymity.
“Adding to that, the BP incident has reminded the whole world of the perils of offshore oil and gas drilling,” added Hari.
In comparison, shale is safer, has better longevity but traditionally has low productivity, as most reservoirs have low permeability. However, with horizontal drilling tactics and by creating artificial fractures by the “hydrofracing” technique, the surface area can be increased and by applying low to medium pressure, gas can be “oozed” out. “Traditionally, recovery from one area is low, depending on the tightness of shale and its porosity,” said an RIL executive. “But new techniques are coming into force every day. This is the future.”
“Low operating costs, significant liquid content (70 per cent of the acreage lies within the condensate window) and excellent access to services in the region combine to make the Eagle Ford one of the most economically attractive unconventional resource plays in North America,” RIL said in a statement.
The deal is also a shift in RIL’s acquisition strategy. Instead of outright buyouts, it is going in for partnerships with existing players like Atlas and Pioneer for joint acreage development. Many analysts feel this is the best way to pick up expertise and get training. “RIL has money, but it needs to learn the dynamics of the shale business. In a developed market like the US, a local player brings a lot to the table. But who is stopping them from hiking their business interests in the same acreage in future? There can be buyouts from RIL, once they master the shale exploration business,” said a Hong Kong-based energy analyst with a foreign brokerage firm.
RIL executives said a new core team to proceed with its shale business is already taking shape, with Walter van de Vijver, a former Shell executive, leading the charge in both the US and the Netherlands. Some of the executives from the Indian operations will also get trained in this new skill set.
Shale gas can be used the same way as natural gas. Which is why RIL will also participate with Pioneer in the development of midstream assets in the Eagle Ford Shale, as a 49.9 per cent partner and will be paying $46 million. The midstream business will initially consist of central gathering facilities to separate condensate production from produced gas and to treat the produced gas. Developing this midstream business, as against contracting with a third party, will provide enhanced control and efficiencies for the marketing of the joint venture’s upstream production and the potential to attract third party business.
Though RIL was already present in the unconventional gas business in India through its interest in coal bed methane, it is quickly building a portfolio of new age and unconventional hydrocarbon resources abroad with the two acquisitions.
Pioneer has about 310,000 acres of shale gas plays in the Eagle Ford region. Being the operator, it had the controlling 84 per cent interest; its partner, Newpek LLC, has 16 per cent. Both companies will now offload 45 per cent of their respective working interests in the acreage to RIL.
The deal has been done through a RIL subsidiary, Reliance Eagle Upstream. Under the new arrangement, Reliance will have 45 per cent share in the acreage, Pioneer 46 per cent, with Newpek holding the remaining 9 per cent. Reliance has agreed to upfront pay $266 million in cash to Pioneer and to also pay an additional $879 million to carry Pioneer's share of future drilling costs over the next four to six years.
As part of the deal, Reliance will also be paying Newpek approximately $210 million for buying its stake. It will also share Newpek’s future drilling costs, by paying it $173 million over the same four to six-year timeframe.
The shale gas business in the US was primarily dominated by small companies. However, over the past year, it has seen a spate of acquisitions by big companies. Royal Dutch Shell acquired East Resources’ shale gas interest in the US for $4.7 billion this May, while Exxon Mobil bought XTO for $30 billion last year. Similar acquisitions were made by Statoil and BG.
Manisha Girotra, managing director and chairman of UBS, one of RIL’s financial advisors in the deal, said: “In the shale gas space, the way to go forward is through a string-of-pearls acquisitions — a multiple of small to relatively midsize buys, as that’s what is available. This (Eagle Ford) is one of the biggest assets in the US... And, a JV (joint venture) route is a clever way to keep the management team intact and imbibe their existing expertise.”
RIL executives said all the discovered oil and gas assets in conventional sand formations were already taken up by global players. So, while RIL will focus on new discoveries, like the one it did in the Krishna-Godavari (KG) Basin in 2001, the focus will increase towards shale and other unconventional energy sources. Power, with fixed annuity return, will also play a significant role in RIL’s energy portfolio.
“RIL is clearly building its economies of scale in shale gas,” said Vandana Hari, Asia news director at Platts, the energy watch agency. “Its part of a bigger strategy. They have heft in India but now want to grow overseas… And, shale is the hydrocarbon story of the decade. If you move in early in the most developed market and build scale, then you have tremendous early mover advantage.”
Shale gas is natural gas stored in organic-rich sedimentary rocks. It is considered an unconventional source, as the gas may be attached to organic matter. The gas is contained in difficult-to produce reservoirs that require special completion, stimulation or production techniques to achieve economic production. It accounts for between 15 per cent and 20 per cent of US gas production but is expected to quadruple in coming years, triggering a scramble among producers, large and small, for access to resources.
“For a late starter of gas exploration like RIL, the opportunities are limited. The prolific gas fields are already taken. Shale is a new opportunity that RIL will not like to miss out on,” said Anish De, CEO Asia of Mercados Energy Markets International, an oil and gas consulting company.
There are other reasons, too, for this subtle but significant review in strategy. RIL insiders said after the big-bang discovery of KG-D6, success has been moderate. The risk perception towards traditional exploration and production activities has gone up. “There have been cases of dry wells across the east coast. Its part of the risk that every player faces. That also means there is no guarantee of 100 per cent strike rate for anybody, including RIL,” said a company official, on condition of anonymity.
“Adding to that, the BP incident has reminded the whole world of the perils of offshore oil and gas drilling,” added Hari.
In comparison, shale is safer, has better longevity but traditionally has low productivity, as most reservoirs have low permeability. However, with horizontal drilling tactics and by creating artificial fractures by the “hydrofracing” technique, the surface area can be increased and by applying low to medium pressure, gas can be “oozed” out. “Traditionally, recovery from one area is low, depending on the tightness of shale and its porosity,” said an RIL executive. “But new techniques are coming into force every day. This is the future.”
“Low operating costs, significant liquid content (70 per cent of the acreage lies within the condensate window) and excellent access to services in the region combine to make the Eagle Ford one of the most economically attractive unconventional resource plays in North America,” RIL said in a statement.
The deal is also a shift in RIL’s acquisition strategy. Instead of outright buyouts, it is going in for partnerships with existing players like Atlas and Pioneer for joint acreage development. Many analysts feel this is the best way to pick up expertise and get training. “RIL has money, but it needs to learn the dynamics of the shale business. In a developed market like the US, a local player brings a lot to the table. But who is stopping them from hiking their business interests in the same acreage in future? There can be buyouts from RIL, once they master the shale exploration business,” said a Hong Kong-based energy analyst with a foreign brokerage firm.
RIL executives said a new core team to proceed with its shale business is already taking shape, with Walter van de Vijver, a former Shell executive, leading the charge in both the US and the Netherlands. Some of the executives from the Indian operations will also get trained in this new skill set.
Shale gas can be used the same way as natural gas. Which is why RIL will also participate with Pioneer in the development of midstream assets in the Eagle Ford Shale, as a 49.9 per cent partner and will be paying $46 million. The midstream business will initially consist of central gathering facilities to separate condensate production from produced gas and to treat the produced gas. Developing this midstream business, as against contracting with a third party, will provide enhanced control and efficiencies for the marketing of the joint venture’s upstream production and the potential to attract third party business.
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