American
refiners closed some of their production, leading to futures trade benchmarked
to the West Texas Intermediate going negative.

The falling demand of crude oil in the US market will
adversely impact investments made by Indian companies in the shale business
there.
American refiners closed some of their production, leading to
futures trade benchmarked to the West Texas Intermediate (WTI) going negative
on Monday.
Though
WTI recovered, investment in alternative fuels like shale has become unviable.
For
RIL, its investment in US shale is providing it negative returns on equity.
The
average realisation for RIL’s shale investment had fallen to $2.71 for a
thousand cubic feet equivalent of shale production.
Besides RIL, GAIL, too, has
invested in shale gas in the US.
When crude oil prices drop,
production of alternative fuels like shale oil and gas becomes unviable.
RIL’s upstream joint
ventures in US shale, include a 45 per cent working interest (WI) partnership with
Ensign Natural Resources in the Eagle Ford shale play, and a 40 per cent WI
partnership with Chevron.
According to industry
sources, the company is unlikely to invest more in exploration in the US in a
lower price regime.
Besides RIL, GAIL holds 20
per cent stake in Eagle Ford shale of Carrizo Oil & Gas.
In 2013, the company tied
up to import 2.3 million tonnes (MT) of liquefied natural gas (LNG) for 20
years from Cove Point.
A similar contract for 3.5
MT was signed with Cheniere Energy’s Sabine Pass project in Louisiana.
In 2017, RIL sold one of
its shale assets for $126 million, a third of the price it paid seven years
earlier, amid a downturn in global oil prices.
Its share of shale
production rose 20 per cent in the quarter ending December 2019 at 23.9 billion
cubic feet equivalent and realisation improved12.5 per cent to $3.05/MCFe, over
the quarter ending September 2019, with improved prices of natural gas liquids.
The realisations would fall
further because of a lack of demand, leading to lower production.
According to Premasish Das,
executive director of oil markets midstream and downstream at IHS Markit,
exploration and production companies in the US will be under immense pressure
to reduce spending and live within cash flow.
“It could lead to many
bankruptcies (among American companies).
"However, given the
uncertainties from the pandemic and its fallout on oil demand and global
economy, it is be unlikely to see many mergers and acquisitions, which would
start once the market stabilises,” said Das.
India has bought shale oil
and gas parcels from the US in the past, but the logistics of shipping it does
not help.
Companies often swap
quantities in order to earn arbitrage out of the shipping cost.
Importing under terms where
the exporter bears the shipping cost or cost and freight arrangement could,
however, be beneficial, considering the low oil cost.
However, Indian demand has
also shrunk because of the nationwide lockdown.
According to Das, the
strategy of increasing crude oil imports from the US makes sense in terms of
diversification of supply sources amid the restraint of Organization of the
Petroleum Exporting Countries’ (OPEC’s) members.
“However, the availability
of crude oils from the US could be challenging as US production will decline
rapidly this year and next.”
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