By Cuckoo Paul

For almost a year now, and especially after the aborted acquisition of chemical giant LyondellBasell, the energy market has been waiting for Reliance Industries to make its next move. Sitting on almost $6 billion in cash, India’s largest company by value has been prowling around the world for lucrative opportunities. The company finally made its wager in April. The bet was placed thousands of miles away in south-eastern United States, on a sandstone rock formation called Devonian shale.

The $3-billion-plus bet on shale gas in two joint ventures signed up since, is RIL’s largest overseas investment ever. Like the gas it seeks to find, the move is unconventional, not the least by the company’s own yardstick. RIL has paid for a minority stake in two companies — 45% each in Atlas Energy’s Marcellus lease and in Pioneer Natural Resources’ core Eagle Ford acreage. Not only are the investments being made without majority control of the companies, they are also in a market that RIL has little presence and virtually no influence over. Neither does RIL have any knowledge of the terrain’s geology. And therein lies the key.

At the core of the shale story is the stunning progress in the technology used to extract the gas from ‘tight’ rocks, through a process of hydraulic fracturing. This involves bombarding the rocks with millions of liters of chemically treated water to force the gas to flow. Shale gas is no different from the regular natural gas (primarily methane), and its presence over a wide area of thousands of acres has been known for years. But it was not pursued vigorously due to the difficulties of extracting it.

The breakthrough came when a bunch of medium-sized oil companies figured out smarter ways of drilling in the last three years. As technology improved, the recoverable reserves were quickly upgraded. In the Marcellus basin in Pennsylvania for instance, reserves grew from 15 tcf (trillion cubic feet) five years ago to 270 tcf now. Little-known, medium-sized companies like XTO, Devon Energy and Pioneerm Natural control the technology and process of extraction. Many are being snapped up by big oil companies who have realized that they cannot afford to be left out of this game. XTO, for instance, was picked up by Exxon-Mobil for a whopping $31 billion deal that was approved by shareholders in June. Other under-capitalized companies are going for joint ventures with foreign companies with deep pockets like BP, Total and most recently RIL.

For Reliance, the partners’ exclusive knowledge in cracking the shale plays is what brings value. But oil analysts are very clear that for the Indian company the prize, ultimately, lies not in the Rocky mountains, but back home.

Precious little has been done in India on shale gas prospecting so far, even though the rock formation is common in several parts of the country like the Damodar basin, Jharkhand and West Bengal. ONGC, probably the only company actively searching for shale gas, has been studying the formations over the past five years and has begun data collection in its own oil and gas blocks. A pilot project drilling the first few wells will be underway by the end of the year. ONGC plans to invest close to Rs. 150 crore and has brought in contractors like TerraTek to start drilling the exploration wells, says an ONGC geologist leading the project. TerraTek is a Schlumberger company that has experience of working in the Barrett field, one of the oldest U.S. shale prospects. The Indian government has no policy on shale and has not permitted commercial exploitation of the gas. But increased awareness of the global success and RIL’s high-profile investments can be expected to shake things up. The Indian market is energy starved and will grow much faster than the U.S. in the future.

“RIL clearly hopes to cut its teeth in the U.S. market which is at the cutting edge of shale gas extraction. The aim is surely to be a big player in this area in India,” says a multinational oil company official, who is not authorized to talk to the media. In the 300,000 acres at Marcellus, RIL will start as a financial partner, but the agreements have the provision for it to turn into an operator in some of the acreage over time. This experience will prove invaluable when India is ready to auction its own shale acreage. The Director General of Hydrocarbons is working on an approach paper that is expected to help lay down a policy for auctions of shale blocks. This could be similar to the policy for coal bed methane blocks that are already being given out.

RIL’s intentions were made clear by executive director P.M.S. Prasad while signing up the Marcellus acreage with Atlas. He said, “The company is entering one of the fastest-growing opportunities emerging in the U.S. unconventional gas business.” The deal “will materially increase Reliance’s resources base and provide Reliance with an entirely new platform from which to grow its exploration-and production business while simultaneously enhancing its ability to operate unconventional projects in the future.”

Shale gas wells cost much less than conventional onshore gas wells, leading to much higher profits for producers. For RIL, the costs will be in stark contrast to the expensive extraction process at its deep-water wells in the KG basin offshore.

But, like with most things in life, all is not hunky dory on the shale patch. Bill Holland, associate editor at oil newswire Platts (he has reported extensively on how shale gas was changing the face of south Texas, in areas that were among the poorest counties in the U.S.), says the biggest challenge would be to manage the environmental impact of production. Fracking (fracturing) a single well takes two to four million gallons of water and most of the mixture, which includes sand and chemicals, returns to the surface and must be disposed of. The fluids are injected into wells far below aquifers used for drinking water, and there are deep layers of impermeable rock between drinking water supplies and fracturing fluids. Yet, environmental groups dispute industry claims that hydraulic fracturing is safe, citing the potential that contaminated drilling fluids can spill from surface storage tanks. BP’s inability to stop the oil leak in the Gulf of Mexico has made it tougher for the oil companies. Upstate New York, where vast shale gas discoveries have been made, has imposed a moratorium on gas production until the impact of drilling is understood and dealt with. Holland says the problems will be more acute in prosperous and more populated areas. “In South Texas where the population is about two people per square mile, no one cares very much,” he says.

The other thorny issue for shale gas producers in the U.S. is that of gas prices. Prices have fallen significantly and are currently close to $5 per unit, especially after the new shale gas finds. The gas is expected to eventually replace more and more oil as more fields come into production. If prices fall below a point, natural gas may even begin to replace liquid fuels for mass transportation. Imports of LNG from Europe to the U.S. have already started falling. For India, the falling price is good news because it frees up more gas for a growing, energy-hungry economy. But the big leap, both for RIL and India, can only come when gas production actually starts here.

This article appears in the July 16 issue of Forbes India, a Forbes Media licensee.