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Carrizo JV Gives India's Gail First U.S. Shale Stake

Carrizo Oil & Gas Inc. and a unit of India's Gail (India) Ltd. have closed on a joint venture (JV) that gives Gail 20% of Carrizo's interest in about 20,200 net acres in the condensate zone of the Eagle Ford Shale for $95 million.

Gail's first acquisition of U.S. shale gas assets was made by newly formed subsidiary Gail Global (USA) Inc., and it anticipates future shale development in the company's home country.

"Keeping in view the prospect of Indian shale gas bidding rounds opening within a couple of years, this experience will hopefully help Gail develop necessary skill sets for shale gas exploitation," said Gail Chairman B.C. Tripathi. "Under the arrangement, Gail shall be sending secondees [transfer employees] to Carrizo to work on the Eagle Ford assets and Gail and Carrizo shall also work together in exploring shale gas opportunities in India and other countries outside of [the] U.S."

The assets conveyed include about 4,040 net acres, primarily in La Salle County, TX, and a 20% interest in eight horizontal wells currently producing about 1,700 boe/d net (340 b/d net to Gail) and 3,800 Mcf/d net of rich gas (760 Mcf/d net to Gail). Carrizo's internally estimated mid-year 2011 proved reserves allocated to the acreage amount to 13.8 million boe (2.76 million boe net to Gail), of which 2.5 million boe are classified as proved developed (0.5 million boe net to Gail).

The consideration to be paid by Gail is composed of $63.65 million in cash and a drilling carry worth $31.35 million. Carrizo said it used the cash proceeds to trim debt under 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," said Carrizo CEO Chip Johnson. "As we continue to control the pace of substantially all of our development activities, we have the flexibility to adjust our capital requirements as necessary."

Including the cash and drilling carry components of the deal, Gail said it expects to spend about US$300 million over the next five years, with a major portion coming from Gail Global (USA) earnings.

The JV is expected to drill an additional 139 wells on the acreage. A rig is in the process of drilling a four-well pad on the JV property, which is expected to be completed and brought on production near the end of this year. Houston-based Carrizo remains operator of the properties and said it expects the $31.35 million drilling carry to be fully realized in less than a year.

Gail is an integrated gas company with interests in exploration and production and liquefied natural gas (LNG). It is listed on India's National Stock Exchange, the Bombay Stock Exchange and the London Stock Exchange. The government of India owns 57% of the company. Most of Gail's business is in India, but it has holdings in China, Singapore and other countries.

"This transaction represents a major step in Gail's efforts to establish its presence in North America," Tripathi said. "As the next logical step, Gail Global (USA) Inc will consider expanding its business portfolio in the North American market by pursuing various upstream and midstream opportunities including LNG export to India."

Gas demand in India is up substantially, rising 21.5% year over year in 2010, according to the 60th annual BP Statistical Review of World Energy (see Shale Daily, June 9).

Under a memorandum of understanding signed between the United States and India last November when President Obama visited the country, U.S. State Department and Indian officials have been working on an initiative to launch shale gas development in India by the end of this year (see Shale Daily, Jan. 12).

Last year India's Reliance Industries Ltd. became a drilling partner of Atlas Energy Inc. in the Marcellus Shale in a deal worth $1.7 billion (see Daily GPI, April 12, 2010). Atlas was later acquired by Chevron Corp. (see Shale Daily, Feb. 22).

Carrizo recently struck deals to acquire additional Eagle Ford acreage (see Shale Daily, June 8), but it will not be included in the JV, the company said. With the expected acquisition of new Eagle Ford acres and the JV the company's Eagle Ford leasehold is expected to be about 41,000 net acres.

Besides the Eagle Ford, Carrizo is active in the Barnett Shale in North Texas, the Marcellus Shale in Appalachia, the Niobrara Formation in Colorado, and in proven onshore trends along the Texas and Louisiana Gulf Coast region. It is also developing an oil discovery known as the Huntington Field in the UK North Sea.

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