Synergistic Alliances
After failing to acquire the giant LyondellBasell, Reliance Industries (RIL) has moved on with its war chest worth nearly $2 billion to acquire other new businesses. In its effort to expand its horizons, RIL went in for a joint venture with Atlas Energy. Two days later, it announced that it has invested an undisclosed amount in Deccan 360.
RIL-Atlas Energy JV
RIL will acquire 40 per cent stake in the Marcellus Shale at a cost of $1.7 billion (Rs 7,500 crore). Reliance will pay $340 million (around Rs 1,500 crore) in cash to complete the deal and an additional $1.36 billion (around Rs 6,000 crore) as drilling cost. The US firm will serve as the development operator for the joint venture. The deal for now states that where the two companies both have an interest, Atlas will take the lead.
Key issues
Option to increase stake. RIL will get to increase its stake in the JV (from 40 per cent to a bigger area of Marcellus Shale from Atlas) on pre-set terms. Though RIL is not an operator in the current JV, the deal promises it operator role too in other areas.
First-mover advantage in domestic shale plays. This JV will give RIL a better and more in-depth understanding of the shale gas opportunity and economics. This could prove advantageous as and when shale gas exploitation begins in India. It can also utilise the experience from its current JV in other parts of the world.
Negative. While the shale gas JV is a positive for the stock price, the expected Supreme Court verdict on the RIL-RNRL case is awaited. If the verdict concurs with the earlier Bombay High Court order, it will be a negative for the stock.
Stake acquisition in Deccan 360
Reliance Industries has also invested an undisclosed amount in Deccan 360, the cargo airline company owned by Captain Gopinath. Reliance Industries has made this investment through a wholly owned subsidiary. RIL's stake in Deccan 360 is expected to be above 26 per cent but below 50 per cent. Two RIL representatives will be on the board of the cargo venture. A Reuters report pegs the investment by Reliance at $20 million to $30 million.
The benefit. This deal will be a win-win for both the companies. Reliance will benefit from the logistics support for its retail segment while Deccan 360 will get a dependable client.
Shale gas: a new horizon
Over the last century shale gas has largely gone unexploited because of the high cost of recovering it. But a five-fold increase in the price of gas with last few years has prompted companies to return to two well-tried technologies: drilling horizontally instead of vertically, and releasing the gas by injecting water at high pressure into the rock.
The Barnett Shale around Fort Worth, Texas, was the first to be commercially exploited on a large scale. The Marcellus Shale, which spans states such as West Virginia, Pennsylvania and southern New York, is the latest.
This article was originally published on May 18, 2010.
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