RIL to invest $1.7 bn in shale gas in US

In its first-ever break through in the United States, Reliance Industries Limited on Friday said its subsidiary Reliance Marcellus LLC would enter into a joint venture with United States-based Atlas Energy. The two sides have executed definitive agreements under which Reliance is to acquire 40 percent interest in Pittsburgh-based Atlas' core Marcellus Shale acreage position.

Reliance will bear an acquisition cost of $339 million and pay an additional $1.36 billion as capital costs for the development programme over seven and a half years.

However, the investment would be scaled up to $3.5 billion over the next 10 years, RIL CFO Alok Agarwal said in Mumbai on Friday.

Shale gas is natural gas stored in organic-rich sedimentary rocks. The gas is contained in difficult-to produce reservoirs that require special completion, stimulation or production techniques to achieve economic production.

RIL will have around 1,20,000 acres (40 percent) of the 300,000 acre Marcellus shale gas project, which spans parts of Pennsylvania, West Virginia and New York and could hold enough natural gas to satisfy US demand for a decade. 

Low operating costs and proximity to the US northeast gas markets combine to make Marcellus one of the most economically attractive unconventional natural gas resource plays in North America, said a RIL press statement.

The acreage will support the drilling of over 3,000 wells with a net resource potential of approximately 13.3 tcfe (5.3 tcfe net to RIL). The transaction is expected to close by the end of April 2010, Agarwal added.

"In the last 1-1.5 years shale gas has completely transformed the US natural gas market. US is becoming more and more self reliant on natural gas after shale gas production has started," said Deepak Mahurkar, Associate Director, PWC.

While Atlas will hold 60 percent of the block and also the operator-ship, RIL is expected to begin acting as development operator in certain regions in the coming years as part of the joint venture.

Under the framework of the joint venture, Atlas will continue acquiring leasehold in the Marcellus region and Reliance will have the option to acquire 40 percent share in all new acreages.

Reliance also obtains the right of first offer with respect to potential future sales by Atlas of around 280,000 additional Appalachian acres currently controlled by Atlas, (not included in the present joint venture).

The Reliance-Atlas joint venture thus has the potential to become one of the largest prime acreage holders in the Marcellus Shale.

Commenting on the joint venture, PMS Prasad, executive director, RIL, said, "Reliance is very pleased to enter one of the fastest growing opportunities emerging in the US unconventional gas business and that too with one of the largest, most experienced energy producers in the Appalachian Basin as partner. This joint venture will materially increase Reliance's resources base and provide Reliance with an entirely new platform from which to grow its exploration and production business while simultaneously enhancing its ability to operate unconventional projects in the future."

Gokul Chaudhri, Partner, BMR Advisors said, "If Reliance wishes to participate in the US gas market, they need to be in the shale gas business. They have the ability and access to technology which will have relevance not only in the US but in India as well."

Barclays Capital Inc. was the financial advisor to RIL for the transaction and Vinson & Elkins LLP was the legal counsel to RIL. Bank of America Merrill Lynch provided strategic and financial advise to RIL for this investment.