Mumbai, Sept. 29: GAIL (India) Ltd has struck a deal with Carrizo Inc of the US under which it will acquire a 20 per cent stake in a shale gas acreage in Eagle Ford, Texas for $95 million.

The $7.6-billion state-owned integrated gas company will acquire the stake through a wholly owned subsidiary — GAIL Global (USA) Inc —which was formed on Wednesday.

The $95-million payout includes an upfront payment of $63.65 million and a drilling carry of $31.35 million linked to Carrizo’s future drilling and development costs. “We believe that this transaction with Carrizo comes at an opportune time,” GAIL chairman and managing director B.C. Tripathi said.

This will be GAIL’s first foray into shale gas exploitation in the US.

Shale is a sedimentary rock composed of mud, quartz and calcite. A new technique called fracking — which involves blasting water into a well to shatter rock and unleash the trapped gas — turned shale gas into a huge business opportunity, sending oil giants such as Exxon and Chevron and newbies such as Reliance Industries and Japan’s Mitsui scurrying to snap up acreage in an arc from Texas to New York.

GAIL is a fairly late entrant into shale gas play in the US and is, therefore, having to stump up a very steep price of $23,515 per acre — way above the $20,000 per acre price seen in recent Eagle Ford deals.

Carrizo will be using the upfront cash proceeds of $65 million to reduce the outstanding balance in its revolving credit facility.

“With the current uncertainty in the global financial markets, we felt it prudent to execute this transaction and take the opportunity to reduce our financial leverage and preserve our liquidity to be better prepared for whatever the future should hold,” Carrizo’s president and chief executive S.P. “Chip” Johnson IV said.

This is Carrizo’s second deal with an Indian entity. In August last year, it sold a 60 per cent stake in its Marcellus shale acreage in Pennsylvania to Reliance Industries for $392 million. That deal translated into a cost per acre of $6,261.98 per acre — the cheapest shale gas deal of the four transactions that Indian entities have struck so far (See table).

GAIL Global (USA) Inc will provide the major chunk of the investment out of its earnings.

The Carrizo-GAIL joint venture will have 20,200 gross acres in the Eagle Ford acreage. The GAIL subsidiary will have 4,040 net acres spread over four counties in Texas, primarily La Salle County.

Carrizo has drilled eight wells that are producing about 2,350 net barrels of oil equivalent per day, which will translate into 470 net barrels of oil equivalent per day net to GAIL. A drilling rig is in the process of drilling a four well pad on the joint venture property, which is expected to be completed and brought on production by the year-end.

The joint venture is expected to drill another 139 wells in the acreage. Carrizo will continue to function as the operator.

The Houston, Texas-based Carrizo said in a press note that it expected the $31.25-million drilling carry to be fully realised in less than one year.

GAIL said in its note that total investment would be around $300 million over a period of five years. It didn’t give the break-up or say how this amount would be shared between the partners.

“This joint venture demonstrates the substantial imbedded value in our portfolio of assets,” Chip Johnson said.

Tripathi hoped that GAIL would be able to develop the necessary skill sets for shale gas exploitation before India threw open its shale gas assets for bidding within a couple of years. Under the arrangement, GAIL will be sending secondees to Carrizo to work on the Eagle Ford assets. “GAIL and Carrizo shall work together in exploring shale gas opportunities in other countries outside the US,” Tripathi said.

GAIL Global (USA) Inc will consider expanding its business portfolio in North America by pursuing various upstream and midstream opportunities, including LNG exports to India.