Reliance Industries Ltd. (RIL), owned by Mukesh Ambani the world’s richest energy billionaire, spent the last three years wagering $5.7 billion on North American shale oil and gas. That may now be paying off as earnings from U.S. output eclipses those in India for the first time.
The operator of the world’s biggest oil refining complex in Gujarat, western India, doubled U.S. production of natural gas and liquids in the last quarter from a year earlier, Mumbai-based Executive Director P.M.S. Prasad said. The yield from Reliance’s biggest Indian field plunged 75 percent from its peak in 2010, the year it bought U.S. shale assets.
“Earnings from oil and gas sales in the U.S. will be sustained,” Prasad said in an interview. “In the next two years, we may not be able to raise gas production in India, while in the U.S. output will continue to gain.”
Reliance needs success in U.S. fields as its returns to investors are the lowest among Asia’s nine biggest oil companies with a market value of more than $20 billion, according to data compiled by Bloomberg. Investors in Reliance have lost 7.6 percent annually over the past three years, or since its gas output in India started declining.
The stock has declined 6.2 percent this year, compared with a 1 percent gain in the benchmark S&P BSE Sensex. (SENSEX) The shares dropped 2.3 percent to 787.90 rupees in Mumbai today.
Reliance and its Asian peers including BHP Billiton Ltd. (BHP) are producing more liquids such as ethane and propane from U.S. shale rock and betting global demand will boost natural gas prices. In the last five years, companies in the Asia-Pacific have invested $115 billion in oil and gas in North America, seeking to use some of the U.S.’s record energy output to feed their economies.
“U.S. shale will become a significant contributor to Reliance’s profit in the next five years because higher prices there will lead to higher output,” said Neelabh Sharma, a Mumbai-based analyst at BOB Capital Markets Ltd., who recommends investors buy the stock. “While it’s primarily liquids production now, gas could pick up once prices rise.”
Natural gas in New York trading fell 6 percent last week to $3.984 per million British thermal units. That’s still up 19 percent for the year after decade-low prices of $1.91 in April, 2012, forced explorers to cut production from shale deposits.
“Gas prices in the U.S. are sustainable at $5.5 to $6 per unit, and at these prices, drilling and production of gas will start buzzing,” Prasad said. “If prices do rise to these levels, we will acquire more assets, drill more and produce more.”
Reliance sells gas from its biggest field in India at a government-mandated price of $4.2 per million British thermal units, a tariff that comes up for renewal in April. The company has higher production costs in India, where it drills in sea beds about a mile deep, while its U.S. wells are on land and closer to the surface.
Production at Reliance’s KG-D6 block, billed as one of the world’s biggest gas discoveries in 2002, fell 39 percent to an average 26 million cubic meters a day in the year ended March 31, according to an April 16 report. Reliance attributed the drop to unexpectedly difficult geology.
Standard & Poor’s upgraded Reliance’s credit rating to two levels above India’s on May 29, saying the company will spend a part of its $30 billion investment over three years on exploration to expand its shale business.
Ambani, who is worth $22.2 billion, is India’s wealthiest man and the world’s richest energy tycoon, according to the Bloomberg Billionaires Index.
Earnings before interest, tax, depreciation and amortization from Reliance’s U.S. business rose 85 percent to $483 million in the year ended March 31. Profit from its Indian oil and gas fields declined 45 percent to 28.9 billion rupees ($512 million). In the last quarter, U.S. earnings reached $155 million, compared with $81 million in India.
The contract to deliver natural gas in January 2018 is trading at $5 per million Btu on the New York Mercantile Exchange. Prices may increase should the U.S. ease export restrictions.
The quantity of gas the U.S. should allow for export has been much debated in Washington. The U.S. Energy Department is weighing 20 applications for liquefied natural gas export terminals.
The department in May conditionally approved the Freeport LNG project in Texas, concluding overseas sales will bring net economic benefits to the U.S. Cheniere Energy Inc. (LNG)’s Sabine Pass terminal in Louisiana is the only LNG project with full government approval for exports.
“A lot of new gas demand from exports, domestic power sector and industries is going to come up in the next five years, and that could put some upward pressure on prices in the U.S.,” said Will Pearson, London-based director for global energy & natural resources at Eurasia Group. “As prices rise along with demand, companies will drill more.”