IHS Global Insight Perspective | |
Significance | Reliance Industries (RIL) and Atlas Energy said that they have reached an agreement under which the Indian group will pay US$1.7 billion for a 40% stake in Atlas Energy's operations in the hydrocarbon-rich Marcellus Shale formation. |
Implications | RIL is the first Indian company to acquire shale gas acreage in the United States. Technological advancements in the country have led to a boom in unconventional gas production, generating a frenzied rush to lock in acreage. |
Outlook | The pace of acquisition in the booming shale gas sector has been fast and furious in recent months, showing little sign of slowing down despite the fact that the surge in production has pushed gas prices down. |
Another New Entrant
Yet another shale gas acreage deal has been announced, as India's Reliance Industries (RIL) and Pittsburgh (Pennsylvania)-based Atlas Energy said on Friday (9 April) that they have reached an agreement on a US$1.7-billion acreage transaction. According to the two companies, RIL will acquire a 40% stake in Atlas Energy's operations in the Marcellus Shale, the hydrocarbon-rich rock formation in the eastern United States that stretches from West Virginia to the state of New York. Under the terms of the deal, RIL will pay about US$340 million in cash and an additional US$1.36 billion of capital costs for approximately 120,000 acres in the Marcellus Shale in south-western Pennsylvania.
The deal is the latest in a flurry of shale gas acreage deals over the past year, as both international and domestic oil companies have rushed to acquire acreage and shore up their gas positions as the "shale gas revolution" continues to unfold (see "Related Articles"). Not surprisingly, the multitude of transactions and the ever-growing number of market entrants is generating significant competition and pushing up the price to play. While the market reacted positively to RIL’s buying in, with the Indian firm's share price in Mumbai (India) closing 1.8% higher on Friday (albeit ahead of the announcement) at 1,123.95 rupees/share (US$25.33/share), investors really liked the transaction for its knock-on effect on other independent players with a presence in the Marcellus Shale. Companies such as Rex Energy (up 8.5%), Range Resources (up 4.0%), and Chesapeake Energy (up 1.9%) all saw benefits from the Reliance-Atlas transaction. Atlas Energy itself saw its stock soar to close at US$38.25/share on Friday, up a whopping 20.3% on the day.
The deal with Atlas will help RIL to build up technical expertise in shale gas extraction by partnering with one of the more experienced exploration and production companies in the Appalachian Basin. RIL is expected to take over operatorship in non-core areas of the Marcellus shale after a few years, which could boost the company's shale gas credentials ahead of India's shale gas bidding round, tentatively expected in 2012 (see India: 19 March 2010: Indian Government Plans Shale Oil, Gas Bidding Round in 2012). The deal will give RIL access to large reserves located near key gas markets along the United States eastern seaboard, which stand to improve project economics and sales margins over the long term. For Atlas Energy teaming up with RIL is a strategy to bring in capital investment to develop the large shale gas deposits, as under the deal the Indian company will finance 75% of Atlas’s respective portion of drilling and completion costs until the US$1.36 billion is fully utilised. RIL's reputation in India of running on low operating costs and its relatively swift project implementation record may also have increased the attractiveness of partnering with the company.
Outlook and Implications
For RIL, the deal with Atlas is a victory after several failed attempts to snag a major energy asset in North America. In March, Reliance lost out to BP in the race for a stake in Value Creation, the Canadian oil sands company, while the Indian firm also saw its efforts to buy bankrupt chemical firm LyondellBasell Industries end in failure. Nevertheless, Reliance's pursuit of shale gas acreage in the United States indicates that the firm remains undeterred in advancing its overseas investment strategy, which could in part also be a reaction to the uncertainties the company has faced in India as a result of the ongoing court case with Reliance Natural Resources Ltd. (RNRL) over gas prices from the D6 Block in the Krishna-Godavari Basin.
Alok Agarwal, RIL’s chief financial officer, said that the company's financial commitment to the joint venture (JV) with Atlas is likely to be about US$5 billion over 10 years. While an increase in the number of wells to be drilled under the deal, which will rise from 108 in 2011 to around 300 in 2013 and 2014, meaning a sharp increase in investment costs over the medium term, the success in reaching a deal with Atlas should leave RIL executives smiling in the longer-term given expectations that gas prices in the United States are likely to rise again as the country moves towards a net importer position by around 2030. The long-term prospects for shale gas sales therefore look favourable and under the deal RIL has options to extend its acreage base by receiving right-of-first-offer with respect to future potential sales by Atlas of around 280,000 sq. km that is not included in the JV. Exercising these rights would help RIL to become one of the largest primary acreage holders in the Marcellus Shale, putting the company in an enviable position to profit from the expected shale gas revolution in the United States.
Related Articles
India-United States-China: 8 April 2010: U.S. Offers Shale Gas Studies to China, India
United States: 29 March 2010: Statoil Acquires Assets in Marcellus Shale from Chesapeake
India: 19 March 2010: Indian Government Plans Shale Oil, Gas Bidding Round in 2012
United States-India: 18 March 2010: India's Reliance Industries Reportedly in Talks to Acquire Shale Gas Acreage in U.S.
United States: 16 March 2010: CONSOL Energy Strikes US$3.48-bil. Deal to Buy Dominion Resources' Upstream Gas Assets
United States: 2 March 2010: BP Eyes Possible Shale Gas Expansion in U.S.
United States: 18 February 2010: Mitsui Takes US$1.4-bil. Position in U.S. Marcellus Shale
United States: 27 January 2010: Total Closes US$2.25-bil. JV Deal with Chesapeake for Stake in U.S. Barnett Shale
United States: 15 December 2009: ExxonMobil Announces US$41-bil. Deal to Buy XTO Energy
United States: 6 August 2009: U.S. Unconventional Gas Briefing: From Imminent Supply Crunch to Unexpected Resource Bonanza