 "Crude price decline hurts shale prospects")
Falling crude oil prices that have touched a six-and-a-half year low have cast a shadow on the viability of investment in unconventional energy sources.
From shale assets, in which Indian companies made a debut when oil prices had soared to more than $100 a barrel, to solar power, where technology costs overbear the zero cost of fuel, analysts are sceptical about the way forward.
At present, Brent crude is hovering around $44 a barrel. Analysts say it is too low for oil companies to make economic sense by investing in unconventional energy sources, though shale oil and gas have generated considerable interest from Indian companies.
Reliance Industries Ltd (RIL) and state-run Indian Oil Corp Ltd (IOCL), GAIL (India) Ltd, Oil India Ltd, have participating interest in US and Canadian shale gas assets. These companies had farmed into these assets when oil was trading well above $100 a barrel.
"The shale gas assets realisation is now negative for Reliance Industries but not for the state-run oil companies as they are still to make some significant investments," said Gagan Dixit, assistant vice-president, Quant Capital.
Falling crude oil prices have already upset RIL's calculations turning its returns negative on average capital employed in its shale gas business. RIL has, so far, invested $8.5 billion in its three shale gas joint ventures in the 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.
RIL, in its first quarter report, said it is cutting down on its capital expenditure to $275 million. "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," Mukesh Ambani, chairman and managing director, Reliance Industries, had said during the company's annual general meeting on June 12.
GAIL India, through GAIL Global (USA) Inc, has made investments in the Eagle Ford shale gas asset in Texas and holds a 20 per cent participating interest in the joint venture with Carrizo Oil & Gas Inc.
"These investments are never made with a short-term view. It would be fair to assess our return on investments accordingly. Besides, a drop in crude oil prices is not here to stay," said a senior executive from GAIL India.
In 2015, many oil majors slashed their capital expenditures. The falling oil prices also affected the rig count in the US, which witnessed a fall since December 2014. However, latest reports have shown that the US shale oil producers have adapted to lower oil prices through optimising costs of production. Companies, however, are still hopeful that oil prices will rise in the long term.
In new energy power sources of solar and wind, however, the trend is slightly different.
The fluctuating diesel prices are pushing the case for solar based off-grid solutions replacing diesel in agriculture, commercial sites and telecom towers. At current price of diesel, a unit of power is produced at Rs 15-17 a unit, meanwhile solar is at Rs 6-7 per unit. With such a differential, non-electrified rural areas are increasingly switching to solar.
The cost of solar power generation has seen a 70 per cent decline from 2010 when solar capacity in the country was mere 2Mw as against 4,000 Mw now.“In areas where there is intermittent load such as farms and rural areas, solar makes economic sense. However, for industrial units where steady load is needed, solar power can be a supplementary power,” said Rupesh Agarwal, advisory partner and leader — energy, BDO India LLP.
From shale assets, in which Indian companies made a debut when oil prices had soared to more than $100 a barrel, to solar power, where technology costs overbear the zero cost of fuel, analysts are sceptical about the way forward.
At present, Brent crude is hovering around $44 a barrel. Analysts say it is too low for oil companies to make economic sense by investing in unconventional energy sources, though shale oil and gas have generated considerable interest from Indian companies.
Reliance Industries Ltd (RIL) and state-run Indian Oil Corp Ltd (IOCL), GAIL (India) Ltd, Oil India Ltd, have participating interest in US and Canadian shale gas assets. These companies had farmed into these assets when oil was trading well above $100 a barrel.
"The shale gas assets realisation is now negative for Reliance Industries but not for the state-run oil companies as they are still to make some significant investments," said Gagan Dixit, assistant vice-president, Quant Capital.
Falling crude oil prices have already upset RIL's calculations turning its returns negative on average capital employed in its shale gas business. RIL has, so far, invested $8.5 billion in its three shale gas joint ventures in the 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.
RIL, in its first quarter report, said it is cutting down on its capital expenditure to $275 million. "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," Mukesh Ambani, chairman and managing director, Reliance Industries, had said during the company's annual general meeting on June 12.
GAIL India, through GAIL Global (USA) Inc, has made investments in the Eagle Ford shale gas asset in Texas and holds a 20 per cent participating interest in the joint venture with Carrizo Oil & Gas Inc.
"These investments are never made with a short-term view. It would be fair to assess our return on investments accordingly. Besides, a drop in crude oil prices is not here to stay," said a senior executive from GAIL India.
In 2015, many oil majors slashed their capital expenditures. The falling oil prices also affected the rig count in the US, which witnessed a fall since December 2014. However, latest reports have shown that the US shale oil producers have adapted to lower oil prices through optimising costs of production. Companies, however, are still hopeful that oil prices will rise in the long term.
In new energy power sources of solar and wind, however, the trend is slightly different.
The fluctuating diesel prices are pushing the case for solar based off-grid solutions replacing diesel in agriculture, commercial sites and telecom towers. At current price of diesel, a unit of power is produced at Rs 15-17 a unit, meanwhile solar is at Rs 6-7 per unit. With such a differential, non-electrified rural areas are increasingly switching to solar.
The cost of solar power generation has seen a 70 per cent decline from 2010 when solar capacity in the country was mere 2Mw as against 4,000 Mw now.“In areas where there is intermittent load such as farms and rural areas, solar makes economic sense. However, for industrial units where steady load is needed, solar power can be a supplementary power,” said Rupesh Agarwal, advisory partner and leader — energy, BDO India LLP.
Gujarat recently came out with a tender of 4,000 solar-based irrigation pumps and Maharashtra soon would issue for 10,000 sets. Other states that will follow are Rajasthan and Madhya Pradesh.
“Progressive states are moving towards solar-based solutions for farmers. The diesel replacement model is workable as the cost of replacement is economically viable now,” said Karan Dangayach, managing director at Shashwat Cleantech, a Gujarat based energy and water solutions provider.
Against Rs 2 lakh per km for constructing power line in rural areas, a basic solar power pump costs Rs 4-4.75 lakh per set. “The cost is for at the least 15 years. There is no input cost for the period,” said Dangayach.
Even if the cost of diesel goes down further, experts believe it still makes sense to replace it with solar. “The cost of generation from diesel would range from Rs 12 to Rs 15 per unit. With solar power cost coming down, off-grid solar is a befitting replacement,” said a Delhi-based power market analyst.
During the April-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,” Edelweiss had said in its report.