Reliance Industries, which invested $600 million more equity in the US shale gas operations in the March quarter, is set to make increased provisions on its shale gas operations over the next five years.
RIL has invested a staggering $9 billion (Rs 59,400 crore) in shale gas assets in the United States but is getting negative returns on its investments due to the fall in crude oil prices which made shale gas production unviable. According to analysts, crude oil should trade at minimum $60 a barrel to turn shale gas operations economical. As on Tuesday, crude oil was trading at $50 a barrel thus hitting the shale gas industry hard.
On Monday, Reliance admitted that the business environment for its share gas operations was challenging, but it expects 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 JVs while limited activity planned in Eagle Ford JV. Thrust remains on preserving long-term value through high-grading of land and development portfolio, retaining optionality, improving efficiency and well cost, as well as optimization of well spacing and completions for enhanced recoveries,” the company said.
Reliance said the financial performance of the shale gas assets remained challenged in the financial year ended March this year with revenue falling by 14 per cent on a year on year basis and on the back of 21% drop in volumes offset by 5% higher unit realization. The opex 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 US$112 million and 33 per cent quarter on quarter in increase basis in its earnings before interest, tax, depreciations and amortization (EBITDA) to US$40 million in the March quarter of FY17 due to increase in gas production volumes and higher realizations but overall numbers were modest compared to significant investments of US$9 billion till date, Kotak Institutional Securities said in a report.
In January this year, Reliance Industries reported that it has 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 has its reserves following a change in accounting standards from April 1, 2016. It has moved from the Full-Cost Method (Indian GAAP) to the Successful-Efforts Method under IND AS. This resulted in a devaluation of oil and gas assets by Rs 39,570 crore as on March 31, 2016.
Investors, however had shrugged off the shale gas concerns as RIL’s shares have shot up by 33.4 per cent since January this year as compared to a 12 per cent rise in BSE Sensex. RIL was trading at Rs 1441 a share on Tuesday after trades.
