New York fracking ban is bad news for RIL, shale gas producers

The ban on fracking by New York state is a double whammy for India’s largest private firm, Reliance Industries, which has invested $7 billion in the US shale gas sector after the 45% fall in crude oil prices.

Analysts say the falling crude oil price is making shale gas sector unviable as the massive investments in shale gas need at least $60 a barrel to sustain operations.

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.

On Thursday, New York banned fracking in the state for health reasons, saying that the fracking alongwith horizontal drilling and chemical laced water can increase risk of cancer, skin rashes, and upper respiratory problems. If rest of the states in the US follow suit, it could put billions of dollars of investment at risk.

Analysts say RIL would be impacted through its 40% venture in Chevron’s Marcellus shale acreage that runs through parts of New York state. Its other shale assets are in Texas and Pennsylvania.

“It will have marginal impact at best as RIL is yet to roll out its proposed $2 billion capital expenditure in the Marcellus region along with Chevron. Moreover, moratorium since 2008 in New York State would have meant that the capital expenditure committed so far would also have been done outside the state. The other two ventures with Pioneer and Carrizzo are profitable and face no uncertainty,” says P Phani Sekhar, fund manager of Angel Broking.

Reliance has already put its 45% stake in its joint venture at Eagle Ford with Pioneer Natural Resources on the block at a valuation of $4.5 billion. The sale is targeted for conclusion early next year.

An email sent to RIL spokesperson to elicit their views did not receive any response.

Another worry is that the returns on capital employed of RIL’s shale gas investments are between 3-4% as on FY14. This is estimated to hit double digits by 2021 but the falling crude oil prices may change RIL’s calculations.

On Friday, RIL stock was up 2.7% to Rs 970 as share.

RIL’s earnings per share from US shale gas assets was Rs 0.7 as on fiscal 2014 and was expected to go up to Rs 11.2 by 2021, as per Barclays.

“Earnings from US Shale, where Reliance has spent $7.4 billion so far, may rise as output increases, but with the steady returns on capital employed at 11-12%, it may not be a key value driver,” says global bank Barclays in a report dated October 8.

For the first quarter of fiscal 2015, RIL’s revenues and EBIDTA from shale gas business were at $270 million and $201 million. But the revenues and EBIDTA grew lower than volumes on a sequential basis owing to weakness in gas prices. Analysts have also lowered production estimates largely driven by Marcellus Shale projects though estimates for Pioneer are higher.

RIL's total investment in the US till July 2014 has been $7.36 billion. The company had invested a total of $2.04 billion in acquiring stakes in three companies, gaining access to 12 trillion cubic feet of reserves.