Domestic travails puts focus on Americas
At a time when its Indian oil and gas business is facing regulatory and operational hurdles and global crude oil prices have hit rock bottom, Reliance Industries (RIL) is gearing up to make a significant entry into the conventional hydrocarbons space in the American continent.
The oil-to-yarn and retail conglomerate said on Friday it had signed a memorandum of understanding with the Mexico’s national oil company Petroleos Mexicanos (Pemex) to “assess upstream oil and gas business opportunities in Mexico and jointly evaluate value-added opportunities in international markets”.
RIL has already tasted success in North America with its three shale gas and liquid assets in the US, which are the main contributors to its upstream hydrocarbons exploration and production business at present. Simultaneously, earnings from its Indian oil and gas business have been steadily declining for a few years now as gas output from its flagship D6 reservoir in the Krishna-Godavari Basin has been on a decline. The Indian oil and gas business has also been mired in controversy and litigation with frequent run-ins with the government on issues like cost recovery and gas pricing.
This is the second partnership announced by RIL in the Americas, with the first one being in Venezuela. The company had signed a similar understanding with South America country’s national oil company Petroleos de Venezuela (PDVSA) in October 2013.
RIL understands markets such as Venezuela and Mexico well since it has been sourcing heavy varieties of crude from these countries to be distilled at its highly complex refinery in Jamnagar.
“The understanding envisages sharing of RIL’s pioneering expertise in deepwater development and best practices in east coast of India and RIL’s experience in shale gas in US,” a statement issued by RIL on Friday said. “RIL will also provide technical support and share experience with Pemex for refining value maximisation and other technical optimisation strategies.”
Though RIL’s statement did not specifically mention any joint investments by the company and Pemex, sources said this is the first step of a larger presence RIL seeks to build in the Gulf of Mexico, one of the most prolific hydrocarbon basins in the world.
“The recent energy reforms that have taken place in Mexico have the potential to unlock 1P (proved) reserves of 10 billion barrels. Most of these reserves are concentrated near the US-Mexico border in the Gulf of Mexico,”a person familiar with the development said. “According to recent reports, around 270 locations with more than 2,300 exploration opportunities have been identified in deepwater Mexico.” He declined to be identified.
With the shale oil boom feeding the energy needs of the US market, Mexico has to find new markets for its oil production and the grade of crude found in the Gulf of Mexico is suitable for RIL’s Jamnagar refinery, this person said.
RIL may also look to leverage its partnership with companies like BP, which has a significant presence in the Gulf of Mexico, this person said. The London-based energy firm is an equity partner in RIL’s oil and gas business in India. BP had invested in RIL’s exploration and production business in August 2011 for $7.2 billion, and is helping the Mukesh Ambani-led firm deal with technical challenges faced at D6.
For companies like RIL looking to invest in hydrocarbon assets around the world, the timing is opportune as crude prices are at an all-time low. On Friday, crude was trading at around $69 per barrel, with prices having fallen as much as 40% since June.
In an interview to a television channel on Tuesday, RIL chairman Ambani had said that he expected crude prices to remain range-bound between $65 and $75 per barrel, considering that Saudi Arabia, which is a member of the Organisation of the Petroleum Exporting Countries, had refused to cut down on oil production to shore up prices.
Typically, when crude prices fall, valuations of oil producing assets fall in tandem.
RIL’s global investments in oil and gas ventures, most notably its investment in US shale assets, has helped the company offset decline in earnings from its Indian hydrocarbons business. Against an estimated peak of at least 60 million standard cubic metres per day (mscmd), gas production from D6, touted to be India’s largest gas find, stood at around 13 msmcd in the September quarter.
Though the new government that came to power in May finally heeded the industry’s call for higher gas prices by raising it to $5.61 per million British thermal units, from $4.2 earlier, RIL is not going to fully benefit from it. In November, Canadian energy firm Niko Resources, RIL’s partner at D6, said that the new gas price was immediately applicable to only the MA block within D6, and not the D1 and D3 blocks, since the government was examining whether RIL had a role to play in the drastic fall in gas output. The operators of the block will get around $40 million in additional revenues in FY15 due to the price hike as 40% of the gas sold in the April-September period came from the MA block, Niko said.
In the September quarter, turnover from RIL’s domestic oil and gas business stood at Rs 1,380 crore, with an operating profit of Rs 818 crore. At the same time, revenues from its US shale business stood at Rs 1,619 crore, with an operating profit of Rs 488 crore.