In its latest efforts to expand the presence in US shale gas industry, Reliance Marcellus II, LLC, subsidiary of Reliance Industries Limited (RIL), India’s largest private sector company, has signed definitive transaction agreements to enter into a Marcellus Shale joint venture with United States-based Carrizo Oil & Gas, Inc. Reliance will acquire a 60% interest in Marcellus Shale acreage for $392 million.
This is the third similar deal in last four months by RIL. In June, RIL announced a $1.3-billion JV with Pioneer Natural Resources for a 45% stake in the latter's shale gas field in the Eagle Ford region in south Texas by making an initial payment of $263 million. RIL has also agreed to invest $1.052 billion towards drilling costs over the next four years. In April, RIL agreed to pay $1.7 billion to Atlas Energy to form a joint venture and own a 40% stake in Atlas' Marcellus Shale operations in eastern United States.
As per the latest transaction, Reliance will acquire a 60% interest in Marcellus Shale acreage in Central and Northeast Pennsylvania that is currently held in a 50-50 joint venture between Carrizo and ACP II Marcellus LLC, an affiliate of Avista Capital Partners. After the deal, Reliance will acquire 100% of Avista’s interest and 20% of Carrizo’s interests in the joint venture. Reliance and Carrizo will own 60% and 40% interests, respectively, in a newly formed joint venture between the companies, stated a company release.
Reliance will pay a total consideration of $392 million, comprising of $340 million of cash and $52 million of drilling carry obligations. The drilling carry obligations will provide for 75% of Carrizo’s share of development costs over an anticipated two-year development programme.
The joint venture with Carrizo will have approximately 104,400 net acres of undeveloped leasehold in the core area of the Marcellus Shale in Central and Northeast Pennsylvania, of which Reliance’s 60% interest will represent approximately 62,600 net acres. This acreage is expected to support the drilling of approximately 1,000 wells over the next 10 years, with a net resource potential of about 3.4 trillion cubic feet equivalent (Tcfe, 2.0 Tcfe net to Reliance). The transaction allows for additional growth in the development acreage, at pre-agreed terms.
Carrizo will serve as the development operator for the joint venture and Reliance has the option to act as a development operator in certain regions in the coming years as part of the joint venture. The transaction is anticipated to close by mid-September 2010, added the release.
Walter Van de Vijver, President, International E&P Business, Reliance Industries said, “Reliance is excited about the opportunity to further expand presence in the Marcellus Shale in the United States. We are pleased to establish a long-term partnership with Carrizo, which has demonstrated operating expertise in the shale plays. The proposed joint venture will supplement strengths achieved through our recent joint ventures and further expands our footprint in North American shale gas operations.”
Jefferies & Company, Inc. acted as lead financial advisor and Vinson & Elkins LLP acted as legal counsel to Reliance. BNP Paribas and Credit Agricole Corporate and Investment Bank provided strategic advise to RIL in respect of this investment.
According to a recent study by research firm IHS Cambridge Energy Research Associates (IHS CERA), shale gas accounts for 20% and could surpass 50% by 2030 in the US from just 1% of US output in 2000. Shale gas and other forms of unconventional natural gas would underpin a significant increase in US natural gas consumption—and could allow the electric power industry to almost double its use of natural gas, from 19 billion cubic feet (Bcf) per day at present to 35 Bcf per day by 2035, said the study.
On RIL's 36th AGM held recently, chairman Mukesh Ambani had said, "Shale gas is the most promising development in the energy area in North America. It is likely to overtake both conventional gas as well as liquid fuels as a source of energy within the next decade." Shale gas development represents a low level of geological risk as the gas is trapped in rock across a wide geographical region in excess of tens of millions of acres. Reliance aspires to build a significant position in the shale gas business, he added.
Reliance Industries Limited has a turnover of Rs. 2,00,400 crore ($44.6 billion), cash profit of Rs. 27,933 crore ($6.2 billion), net profit of Rs. 16,236 crore ($3.6 billion) and net worth of Rs. 1,37,171 crore ($ 30.6 billion) as of March 31, 2010.