India’s affinity for US shale plays fading slowly but surely

The move by state-run explorer Oil India Ltd to exit the US shale business months after Reliance Industries divested all its US shale assets signals the intent of India’s oil companies to reduce their overseas footprint and focus at home where the energy landscape is expected to change at breakneck speed, analysts told S&P Global Platts.

With Indian state oil companies keen to diversify their energy portfolios beyond the core refining and upstream businesses in an effort to embrace the energy transition process, private companies such as Reliance are either rapidly snapping up stakes in companies involved in clean energy or are announcing projects with a lower carbon footprint.

“The move by India’s oil companies to exit from US shale assets indicates they are not necessarily the most attractive investments to focus on in a changing energy scenario. It makes commercial sense to do so now rather than in 2020 or early last year when the market was at its weakest,” said Kang Wu, head of Asia analytics and global demand at S&P Global Platts.

‘It also highlights the intention of these companies to focus on the Indian domestic market where opportunities for new investments, particularly in the clean energy space, are opening up,” he added.

Company officials said that the overseas arm of state-run explorer Oil India had exited the US shale oil venture by selling its 20% stake to partner Verdad Resources LLC, reflecting the shyness of Indian oil companies to hold stakes in US shale assets for long.

According to Platts Analytics, US shale is currently profitable, especially with oil prices north of $80/b, as the average breakeven to drill a new shale oil well is around $40/b.

Fading interest

Oil India in 2012 bought a 20% stake, while state-run downstream company Indian Oil Corp picked up 10% stake, in Carrizo Oil and Gas’ Niobrara shale business in Colorado. But in 2018, Carrizo sold its entire share in the Niobrara asset to Verdad Resources LLC, making it the new operator of the asset.

Both Indian companies were supposed to receive a 30% share in Carrizo’s output of about 1,850 barrels of oil equivalent/day from 24 gross wells, as per original terms of reference.

The exit of Oil India from the Niobrara shale asset marks the second exit of an Indian oil company from the US shale business in two months, after downstream private major Reliance Industries Ltd announced a similar move.

Oil India is a fully integrated exploration and production company in the upstream sector. Besides having a presence across India, it has participating interests in overseas blocks in Russia, Nigeria and Libya.

It also operates a 1,157 km pipeline in India’s northeast to transport crude oil produced by both Oil India and ONGC in the region to the Numaligarh, Guwahati, Bongaigaon and Barauni refineries, and a branch line to the Digboi refinery. Besides its crude oil trunk pipeline, Oil India has also commissioned a 660 km product pipeline from the Numaligarh refinery to Siliguri.

Lucrative options at home

Oil India has also ventured into city gas distribution projects to diversify into non-E&P energy value chain.

As one of its strategic initiatives to increase its clean energy portfolio, Oil India has also selectively diversified into the renewable and alternate energy sector by installing and commissioning wind and solar projects with a total capacity of 188.10 MW.

“It seems like Indian oil companies are finding domestic energy policies more favorable and therefore increasingly deciding to invest in the domestic sector,” said Ravinder Kumar Malhotra, former director general of the Federation of Indian Petroleum Industry.

A similar trend is also visible among private refiners.

Reliance’s US-based wholly-owned subsidiary Reliance Eagleford Upstream Holding LP in November 2021 divested its entire interest in upstream assets in the Eagleford shale play in Texas. This also marked Reliance’s exit from all shale gas asset holdings in North America.

Like many other energy CEOs, Reliance chairman Mukesh Ambani had been bullish on the outlook for shale gas until 2014, before a drop in crude prices hit the valuations of those assets. Shale gas blocks took a bigger hit than conventional oil and gas blocks as shale gas blocks are commercially viable only when prices are above a certain level.

Analysts have said the decision by Reliance to exit US shale business will help it reap two gains — it will not only send a signal to the market that it is accelerating efforts toward reducing its carbon footprint, it will make its intentions clear on focusing at home in India, where per capita energy consumption is about one-third the global average and is set to grow exponentially.

“There is huge focus in the clean energy sector in the domestic market, whereas returns on investment in US shale and other overseas sectors have been fluctuating sharply. Therefore the opportunities for Indian energy companies to find opportunities for diversification and new investments are endless,” Malhotra said.

Source: S&P Global Platts

Tags: India, Oil India Ltd, Shale
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