When Reliance Industries was negotiating its $3.4 bn investments in US shale companies- the world was different. America was energy starved and looking desperately for ways to reduce dependence on the Gulf. For RIL, shale gas was seen as the next big thing, after its offshore find earlier in the decade. It would give the energy giant knowledge of the new ways of gas production, as well as allow it to ride the gas price boom. Three years down the picture is different. The United States is floating in natural gas- storages all over the country will max out in the next few months and prices are at ten-year lows.

Some say producers may soon have to give away the gas free- with money being made only on associated liquids and condensates that were initially considered by-products. RIL is `right-sizing’ its activity in the shale fields and the portfolio mix on its investments in shale assets. Like other producers here, it will focus on ramping up its production in liquid-rich fields and cutting costs at fields where there are little or no liquids. Gas prices that peaked at $13 a unit (measured as mmbtu-million british thermal units) in 2008, are marginally above $2 now. Prognosis for gas prices over the next few years is not too bright. But the associated liquids still trade at roughly 50 per cent of oil prices- which are still very high.

In its Annual report for 2011-12 released this week, the RIL management says it will take a prudent approach to the shale production ramp up. The company has three big investments in US shale. Two of the joint ventures with Chevron and Carrizo are in the Marcellus formation in eastern US and one is in Eagle Ford in Texas with Pioneer Natural Resources. Investments in all the three ventures has been largely on drilling wells- as shale extraction requires hundreds of wells to be dug. The company has set aggresive cost-cutting targets for the Chevron joint venture.

“It has now become a rush for liquids,’’ says Bill Holland, the Washington DC based associate editor at Platts gas daily. Smart companies are trying to figure how to reduce their costs and improve fracking techniques, he says. It costs only 80 cents to get out a unit of gas at Marcellus- so companies there are still making money. The real challenge is to keep head above water in the dry fields- which produce only gas and no liquids. Analysts here expect consolidation among shale gas companies later this year. Private equity firms like KKR are already buying up a lot of assets at valuations that are much lower than the peak. Most of these deals are with the intention of flipping over the assets, when circumstances change. KKR Natural Resources, the PE firm’s vehicle for gas investments already has a $900m portfolio.

Despite the sorry rate of return on the shale gas at the moment, there is one good reason for Reliance to stay invested in US shale. And this is to do with being at the cutting edge of fracking- the technique for gas extraction from dense rock. In what will surely be a first for an Indian company, Reliance Industries may soon become the operator of shale fields in Pennsylvania. The contract in the joint venture with Carrizo, where it has invested close to $500m allows this. This would be a big step for the company in terms of figuring out the operations first hand. Many Chinese, Korean and French companies continue to remain invested the shale ventures for this reason. Cash rich companies such as Reliance Industries and CNOOC (China National Offshore Oil Company) have to a great extent, bankrolled shale ventures of small and medium sized US companies.

CNOOC invested over $2.4bn for a stake in Chesapeake Oil’s lease holdings in various shale fields. Like India, China is trying hard to replicate the US success in shale- so far with mixed results. The current glut of gas in the United States is in sharp contrast to the energy shortages in India and China. In India, the ministry of petroleum and natural gas has kicked off initial rounds to explore shale formations for gas. Once the process is underway, it could well be RIL’s day in the sun- once more.

Occupy Wall Street activists march through Midtown during May Day 2012 demonstrations in New York. Image: Andrew Kelly/Reuters.

New York mayor Michael Bloomberg was the lead hate figure for thousands of protesters in Manhattan yesterday, as the Occupy Wall Street movement came back to life. The billionaire mayor, who cleaned out the protesters camp at Zucotti park last winter and advised them to ‘find jobs- and do some work’, was on several placards right up with Citibank chief Vikram Pandit and other bankers. The Fat Cats are under fire from the other 99%, for their multi-million dollar paychecks.

Tens of thousands of protesters, mostly left wingers filled the city baiting policemen from the NYPD with slogans and taunts through the day. The department was out in full force,  ready to control and guide the crowds away from Wall St into other open areas in the city. For all their efforts, for scores of students, migrants and ordinary people, the street has become the biggest symbol of greed and avarice.

New Yorkers and tourists alike flocked to all the protest locations to follow the parade and cheer the protesters. Everyone was keen to capture the color on their iphones and tablets. Innovative slogans and costumes got the loudest cheers- while policemen were heckled if they were anything other than polite. “That’s maah tax money, that’s paying your salary officer,’’ shouted a lady to a police captain who was trying to get her to fall in line.

I spoke to David Frank, a young lawyer working at one of the firms on Wall street, who was watching the parade on his way home.  “Not everyone working on the street is what they think- most of us are trying to make a living. Just like them,’’ he said.

Mayday, which has never been much of an event in the United States, was marked by the Occupy gang with gusto. The red flags and calls for a more equitable distribution of wealth are growing louder every month, say observers here. Everyone with any grouse against the system seems to be on the picket lines. So there were those who want more pensions, better healthcare coverage, free education and more liberal immigration laws! Younger folks wanted to know where the after-party was going to be. Whether it makes a difference to Pandit’s paycheck or not- the movement is certainly not going away in a hurry.

Some of my favorite signs- at least those that can be printed on this blog:

• 1. I Think, therefore I Occupy.
• 2. Occupy the Future.
• 3. On Wall St- Slumlord Billionaires.
• 4. Pay your Interns!

The accounts of Kingfisher and Air-India  have occupied prime real estate on newspaper front pages for much of the past two-three years. Every nuance of their journey down the tube is being captured up close. Though not many see it, the two are joined at the hip in many ways. Brand new planes combined with massive debt, cancelled flights, delayed salaries and frustrated lenders. All kinds of cookie-cutter solutions have been tried to revive them. Yet both remain on the flight path to perdition.  It is time now to think out of the box.

A solution that would end their problems has actually been staring at us all along. The answer, luckily enough for us, also comes from the airline industry. It is consolidation. Dozens of airlines have found out, after similar exploration in the past ten years, that Scale is the solution. Carriers all over the world are proof of this. Take a look at the largest– Air France-KLM, Delta- Northwest and more recently United and Continental. There are scores more. You’ve tried everything and it hasn’t worked. Now try this. Merge Air India with Kingfisher Airlines.

Like the pros, let’s first ask a few tough questions.

What synergies does the deal bring?
Well firstly and most importantly- Size. At 190 planes and a route network that spans the world, this will be the mother of all airline companies in India. Outsizing Jet Airways and Johnny-come-lately IndiGo, not just now but for years to come. Imagine the pricing power. Everything from champagne to cucumber sandwiches can be sourced much cheaper.  With a market of over 40%, this juggernaut will be impossible to ignore. Airfisher will set the rules (and fares) that everyone else will have to follow. Vendors of aircraft, engines, spares and aviation fuel will queue up—and it won’t be for their unpaid bills. The new management will be able to squeeze out efficiencies, easily cutting operating costs by at least half. And bringing down CASK (cost per available seat km), as every airline knows, is the key.

What do the two have in common?
Oh, everything. For starters- they are both loss-making. In fact, humongously so. Kingfisher Airlines has managed to accumulate losses of Rs 6,000 crore, while the flag carrier is at Rs 13,500 crore.
As it happens, both also compete neck-on-neck for the lender’s rupee (and dollar/euro)- with AI’s debt at Rs 18,000 cr, and IT (the IATA code for Kingfisher) at Rs 7,000 cr. Binding them together are SBI and ICICI, the lead bankers to both carriers. Common negotiations on loan restructuring and haircuts will make things much easier for the airlines as well as the bankers.
On another plane, they also happen to fly a lot of common equipment. More than half of AI’s fleet is Airbus made– A319, 320 and 321s– the same is true of IT. Common fleet, pilots, crew and spares. Think of how much cost that will remove. The hallmark of a great airline merger, as we all know from the Kingfisher- Deccan example that played out not so long ago, is fleet type and route commonality. Both airlines flew Airbus planes to more or less the same routes. This merger will only take it higher.

Will it cut losses?
Of course. Talk about sweating the assets—LCCs will surely learn a lesson from this. Everyone knows about Air India’s 30,000 employees who have little to do but take Rashtra Bhasha  exams. They will suddenly have work on their hands. The aircraft to employee ratio will swing back to normal. Engineers will have 68 more planes on their hands and so will the pilots. Losses will come down over time, as efficiency improves. There will be a lot more flying, higher revenues and certainly many more good times.