 "Reliance shale gas returns turn negative in US")
According to an analysis by British bank Barclays, the average return ratios of RIL’s US shale assets have declined by two per cent in the June quarter. The returns were earlier estimated to hit double digits by 2021, but falling crude oil prices have upset RIL’s calculations.
As a result, RIL is cutting down on its capital expenditure to $275 million in the June quarter and analysts expect a 25 per cent year-on-year reduction in capital expenditure in the segment.
In the June quarter, the shale gas segment recorded a loss of Rs 50 crore from a comparatively healthy March quarter earnings before interest and tax (Ebit) of Rs 340 crore. “This was mainly due to the shale gas segment facing macro headwinds characterised by weak benchmark prices and high differentials,” said Edelweiss.
“Our shale gas business’ profitability is directly linked to oil and gas prices, which have been under pressure in 2015. At the same time, operating costs have declined, too, due to lower energy prices and lower deployment of rigs and associated services. We are long-term investors in the shale gas business and our strategy is not dependent on a particular quarter’s performance,” an RIL spokesperson said.
In the annual shareholders’ meeting held on June 12, RIL Chairman Mukesh Ambani had said falling oil and gas prices created a tough operating environment for the shale gas business in the US, which generated revenue of close to $1 billion in 2014-15.
“We have responded by reducing capital expenditure across all our joint ventures and were able to reduce operating costs by 25-30 per cent, which will improve margins. The decision to divest our interest in EFS (Eagle Ford) Midstream for over $1 billion has been guided by our motive to maximise returns. We will optimise our investment in upstream shale gas joint ventures to generate maximum value,” Ambani said.
RIL sold its 45 per cent stake in the shale gas pipeline asset for $1.07 billion in June this year. Of this, RIL will get $574 million at the closing of the transaction and final payment of $499 million after a year.
Analysts say RIL is taking steps to cut losses. “Strong operational trends and successful capex management helped alleviate the pain. The RIL management believes it can consistently achieve 15-20% cost efficiencies in all aspects of its shale operations,” said Edelweiss analysts Jal Irani and Yusufi Kapadia in a note date July 24.
Analysts said falling crude oil prices, coupled with widespread protests against shale gas projects in the US, were increasing risks for investors. Many states in the US like New York have banned shale gas projects, saying these contaminate ground water with chemicals. Due to these factors, many companies are reducing their exposure to shale gas assets in that country.
The falling crude oil price is making shale gas sector unviable as the massive investments in shale gas needs at least $60 a barrel to sustain its operations, analysts said. Oil from shale gas assets costs between $50 and $100 a barrel as compared $10 to $25 a barrel produced by the middle-east countries from conventional methods of oil exploration.
New York banned fracking in December last year on health reasons saying that the fracking alongwith horizontal drilling and chemical laced water can increase risk of cancer, skin rashes, and upper respiratory problems.