Reliance to take more write offs on US shale gas assets

Reliance invested $600 more in shale gas in March quarter

Reliance Industries Ltd (RIL), which invested $600 million more equity in US shale gas operations in the quarter ended March 31, has said it will have to take an impairment hit on these assets over the next five years because of falling crude oil prices. 

Impairment is described as a reduction in the recoverable amount of a fixed asset below its book value.

RIL has invested a staggering $9 billion (Rs 59,400 crore) in shale gas assets in the US but is getting negative returns owing to low crude oil prices, which have made shale gas production unviable. According to analysts, crude oil should trade at a minimum of $60 a barrel to turn economical. As on Tuesday, crude was trading at $50 a barrel. 

RIL, which has three joint ventures (JVs) in the US in the shale gas sector, was one of the early investors in the industry. Reliance admitted that the business environment of its gas operations was challenging, but said it expected the current calendar year to be better than last year. 

“The shale gas business is taking a cautious approach to resuming development. The zero rig strategy continues at Marcellus JV, while limited activity is planned in Eagle Ford JV. Thrust remains on preserving long-term value through high-grading of land and development portfolio, improving efficiency and well cost, as well as optimisation of well spacing and completions for enhanced recoveries,” the company said.

RIL said the shale gas revenue fell by 14 per cent on a year-on-year basis and on the back of 21 per cent drop in volumes offset by five per cent higher unit realisation. The opex (operating expense) trends remained encouraging but could not offset the impact of lower prices, it added.

RIL’s shale business reported 22 per cent increase in revenues to $112 million and 33 per cent quarter-on-quarter increase in its earnings before interest, tax, depreciation and amortisation (Ebitda) to $40 million in the March quarter of FY17 due to an increase in gas production volumes and higher realisations but overall numbers were modest compared to significant investments of US$9 billion till date, Kotak Institutional Securities said in a report on Tuesday. 

In January, RIL reported it had written down Rs 39,570 crore in value of its oil and gas assets due to falling production at its KG gas off Andhra coast in India and American shale gas projects due to a change in accounting policy. The company said it moved from the full-cost method (Indian GAAP) to the successful-efforts method under the Indian Accounting Standards (IndAS). This resulted in devaluation of oil and gas assets by Rs 39,570 crore as on March 31, 2016. 

Investors, however, have shrugged off the shale gas concerns as RIL shares shot up by 33.4 per cent since January, compared to a 12 per cent rise in BSE Sensex. RIL shares closed at Rs 1,432 a share on Tuesday. 

A Morgan Stanley analyst said the weak performance of shale gas operations was driven by declining volumes as well as lower realisations on oil and gas.  “RIL maintained it is focused on capex and opex rationalisation in this business, and with the start of LNG exports from the US as well as petrochemical plants, both realisations and gas prices are likely to inch up, helping it to gradually turn around this business,” a report by the firm said.

Abhijeet Bora, Research Analyst, Oil & Gas, Sharekhan, said the company's US continues to disappoint with a loss. “The outlook for US Shale Gas business remains bleak given uncertainty with regards to ramp-up of the gas production due to volatile gas prices in the US.”