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RIL's shale gas dream hangs in balance as gas price falls

Reliance Industries' shale gas operation becomes completely unviable in a low gas price scenario because of the higher cost of production

twitter-logoNevin John | March 19, 2020 | Updated 15:30 IST
RIL's shale gas dream hangs in balance as gas price falls

The ambitious shale gas business of Reliance Industries (RIL) in the US faces a fresh set of challenges as natural gas prices fall under $2 a million British thermal unit (mBtu). The operation becomes completely unviable in a low gas price scenario because of the higher cost of production. Analysts expect that gas prices may not move up in the next couple years.

RIL's shale gas volumes were higher by 20 per cent in the December quarter, compared to September quarter as new wells put on production in its assets - eight blocks in Marcellus and 13 in Eagle Ford. The company expects more volumes in the January-March period. The blended realisation is 12 per cent higher quarter-on-quarter and 28 per cent lower year-on-year.

The US shale volume fell 32.4 per cent to 94.5 Billions of Cubic Feet Equivalent (Bcfe) during the last financial year. The company has generated a revenue of $64 million in the December quarter, but posted an EBITDA (earnings before interest, tax, depreciation and amortisation) loss of $7 million. The losses reduced by $12 million quarter-on-quarter.

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RIL said that it had better operational performance in terms of costs, production and cycle time in Eagle Ford. But the development activity has slowed down in Marcellus. It has two joint ventures for shale gas exploration and production. In the first JV, Pioneer Natural Resources holds 46.4 per cent stake, while RIL has 45 per cent. Chevron Upstream Northeast holds 60 per cent stake in the second JV, in which RIL's stake is 40 per cent.

"Reliance continues to focus on value preservation in the shale gas business. In this regard, the company is restructuring its shale gas assets through cross-border merger of Reliance Holding USA Inc (RHUSA) with RIL," the company said in the last annual report.

The lower natural gas prices have hit the shale gas drillers in the US hard. Analysts say the problem will deepen as the gas glut wears on longer. The New York Mercantile Exchange (NYMEX) natural gas prices have been trading below $2 a mBtu since January, leading to a selloff in the sector.

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RIL, which was at one point of time bullish on shale gas and invested around $5 billion, has pruned its interest in the last four years because of weak crude oil prices that affected its financial performance. In June 2015, RIL sold its Eagle Ford (EFS) midstream joint venture with Pioneer, realising $1 billion from the sale. In 2016, RIL sold a shale gas block for $126 million - a third of the price it paid to buy nine years ago. In the third deal, it sold assets in Texas to Sundance Energy for $100 million in 2018.

The present situation is worse as a major shale gas producer, Noble Energy took a $1.1 billion write-down in its natural gas assets in Eagle Ford, resulting in a quarterly loss of $1.21 billion.

RIL and Chevron had adopted a zero drilling strategy to conserve cash and cut the losses about three years ago, but the joint venture resumed drilling about a year back. RIL had been bullish on shale gas until late 2014 when crude oil prices started falling. The shale gas blocks had suffered as they are economically viable only when prices are above the $3-4 per mBtu threshold.

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