Reliance Industries buys 21% of Atlas' Appalachian shale gas holdings

After letting The Netherlands-based LyondellBasell and Canada-based Value Creation slip through its fingers, Reliance Industries (RIL) managed to take a 40% stake in a section of a shale gas field in north-eastern United States in a $1.7 billion deal.

RIL will pay $340 million (Rs 1,600 cr) upfront to US-based Atlas Energy and make follow on payments totalling $1.36 billion (Rs 6,400 cr) over the next five to seven years for a 40% stake in the Marcellus block, part of the Appalachian holdings of Atlas.

RIL will have preferential rights to buy about 280,000 of Appalachian region acres outside the joint venture at $8,000 per acre should Atlas decide to sell them.

The Marcellus region accounts for around 52% of Atlas’ total holding of 580,000 acres in Appalachia.

The Appalachian holdings itself accounts for about half of Atlas’ total proven gas reserves of 1 trillion cubic feet (tcf).

The whole of Appalachian region produced an average of 1.28 million cubic metres (mmsmd) of gas per day during the quarter ended December, according to Atlas’ quarterly update in February.

However, Atlas also clarified that all of the 300,000 acres transferred to the joint venture with RIL is undeveloped.

Neither firm clarified the extent of proven reserves in the transferred area, but RIL said the region under the joint venture has a “net resource potential” of 13.3 trillion cubic feet.

For comparison, RIL’s KG D-6 block has a production of around 60 MMSCMD, proven reserves of around 11 trillion cubic feet and potential reserves of around 37 trillion cubic feet.

Atlas said the two companies have agreed to drill 45 more wells in 2010, 108 in 2011, 178 in 2012, and 300 in 2013 and 2014.
About 85% of the expense for this will be borne by RIL as part of the staggered payment.

“This transaction will enable us to accelerate sharply our development of the Marcellus. As a result of this joint venture, we anticipate creating a significant number of new, well-paying  Pennsylvania jobs,” Atlas CEO and chairman Edward Cohen said.
Shale gas occupies the same place in the US as coal bed methane or coal seam gas does in India. Found under shale rock layers, the gas contributes more than 5% of the US domestic gas supply and is expected to increase its share in the coming years.

Like coal fields, shale rock deposits too became a commercially viable source of natural gas only in the last 5-10 years when natural gas prices shot through the roof.

Gas is extracted from shale formations through a process known as hydraulic fracturing in which millions of gallons of chemically treated water and sand are forced into wells to crack rock and allow gas to flow.

Most wells are drilled horizontally to expose thousands of feet of rock.

Shale gas will account for 50% of US supply by 2035, up from the current 5-10%.

The cost of finding and developing the field was around $1.21 per 1000 cubic feet, according to Atlas’ December quarter update. However, high gas prices prices in the range of $3-7 per 1000 cubic feet or MMBtu make the operation viable.

The only other option for United States, which depends on gas for 25% of its primary energy needs, is liquefied natural gas, which has costs around $2-3 per MMBtu in terms of liquefaction, shipping and re-gasification costs.

Both RIL and Atlas said there is more room for the joint venture to grow and RIL may invest as much as $5 billion over the next ten years as the area can support an additional 2,000 wells even after the first 1,000 wells are dug under the five-year programme. The joint venture will have the option of expanding its holding to adjoining areas on similar terms while Altas will charge $8,000 per acre for areas further afield.

The venture will “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,” P M S Prasad, executive director, RIL, said.
The transaction will be closed in April, the companies said.