Reluctant RIL may be forced to accept Chevron-Atlas deal

NEW DELHI: Reliance Industries’ ambitions to become a key player in shale gas will push the company to accept the $3.2 billion Chevron-Atlas Energy deal despite several concerns, but its strategy will be finalised this week when the board of its subsidiary, that acquired shale acreage in the US, considers its options.

Reliance had acquired shale acreages from Atlas Energy last April, outbidding Chevron, but the Indian company is miffed that it was not kept in the loop about the US oil major’s acquisition of Atlas.

The board of Reliance Holding, a fully-owned foreign subsidiary of RIL that acquired the acreage, will meet this week to decide its final strategy on the deal that has a direct bearing on RIL’s shale gas plans in the US. Chevron and Reliance have been partners in the past. The US major, whose market capitalisation is almost three times that of Reliance, had acquired a small stake in the export-focused Jamnagar refinery but the two companies parted ways instead of expanding their relationship.

The options on the table for Reliance include a counter-bid, exiting the joint venture with Atlas (that will now be with Chevron), or accepting the deal and partnering Chevron. The board will take a final call ahead of February 16 when a special shareholders’ meet of Atlas Energy will vote on the proposed Chevron-Atlas deal.

RIL has little option but to accept the corporate deal by which Chevron acquires Atlas and partners RIL in the Marshellus block among others, two persons with knowledge of the deal told ET. This is not to say that RIL does not have concerns. RIL’s strategy of entering the unconventional shale gas sector in the US was planned on certain assumptions and “understanding” with Atlas . One of the major ones being that the Indian energy major would take up operatorship in some of the existing blocks and the new acerages after a few years by when RIL would have acquired the skill-sets.

It is now left to be seen how this plays out with Chevron that plans to kick-off its shale gas plans in the US through this acquisition. “The chemistry between Atlas and RIL and that of Chevron with RIL is not comparable,” one of the persons said.
RIL has written to Atlas expressing its concerns and unhappiness at not being considered or kept in the loop about the Chevron deal, although talks began within a month of RIL concluding its deal. The Atlas board, however, has decided to go ahead with the vote at the shareholders’ meet.

Chevron, the second-largest oil giant in the US, has proposed to acquire Atlas Energy for $3.2 billion cash-cum share deal. RIL had beaten Chevron in April 2010 in the race to acquire a share in the Marcellus assets owned by Atlas Energy. Chevron’s bid to now buy out Atlas and merge it comes as a sweet victory that will “disturb RIL’s comfort zone in the shale gas play” a former RIL official closely associated with its overseas ventures said.

But RIL ‘may not have much of an option’. Pitted against Chevron, a giant oil company, that has large on-land natural gas assets in the US, RIL would have to weigh the pros and cons before taking up a direct bidding bout. “Its like having to choose between the rock and hard place and we are not left with many choices,” a senior RIL executive said. RIL is not too sure if it wants to rock the Chevron boat at this point.

It is argued that a counter bid may lead to a long-drawn battle, and RIL would be left to run a business with an “uncomfortable partner” for at least 25 years. Chevron’s last engagement with RIL as a equity partner in RIL’s new Jamnagar refinery where the former had plans to take a stake of 28% did not end on a very good note. Chevron, did not exercise its right to increase its stake of 5% to 28% citing reasons of concentrating on upstream ventures, something that the industry and market did not buy.

But almost every stakeholder in this high-powered game is tight-lipped at the moment waiting to see how it plays out. To an email query sent to Atlas, the spokesman said: “For a variety of legal and business reasons, our company’s proxy materials, which have been filed with the US Securities and Exchange Commission, we are really all that we are able to say publicly at this time”. An RIL spokesman also declined to offer any comments sent on the deal.

Reliance Holding has been in touch with boutique investment bankers Perella Weinberg Partners and the law firm Kirkland & Ellis, to decide upon its options and the future strategy. The other option, which at this point looks far fetched, is for RIL to try and block the transaction on valuations by moving a class action suit, a person in the US-investment banking circles said.

Consider this — RIL had paid $14,000 per acre in April 2010 when it bought a 40% interest in some of the Shale gas assets owned by Atlas. Market estimates put out by analysts say that the Chevron offer would work out to an estimated $5000 per acre, less than half of what RIL paid. It seems intriguing that RIL was not approached for the by Atlas, a US-based energy analyst said, who declined to offer comments on record. “Some assurances were given by Atlas as part of the deal that if they considered a company transaction, they could consider RIL,” he said.

In a reply to an email query, the Chevron spokesman said Kurt Glaubitz, Chevron will not comment on the Reliance letter. Atlas stockholders will meet on February 16 to consider and vote on a proposal to adopt the agreement and plan of merger. Chevron believes this is an attractive transaction for Atlas shareholders which Chevron looks forward to completing.