A clear policy on exploration and production of shale gas is the first step to tap the potential of shale gas in India.
Even until a decade ago LNG (Liquefied Natural Gas) re-gasification terminals were being planned along the US coast in anticipation of US being a large importer of natural gas. However, in 2012, approvals were granted to construct LNG terminals at the very same sites for export to gas hungry markets in Asia. Over the last five years, the price of natural gas in US has fallen sharply, from about US $12/ mmbtu in the first half of 2008 to an average of US $3/mmbtu in 2012. The reason was the boom in production of shale gas i.e. natural gas adsorbed in fine-grained sedimentary rock, which has very low permeability and is spread over large territorial areas. Technological advances in horizontal drilling and hydraulic fracturing have made shale gas production commercially viable.
Lower gas prices have given a boost to petrochemical, fertiliser and other manufacturing units where natural gas is the key feedstock. It has also helped US move away from using coal for power production thus reducing its carbon footprint as natural gas emits 40 – 50 percent less carbon dioxide compared to coal. The result of this success has led other nations to explore and develop local shale gas reserves. Leading the race is China, which has the largest estimated reserves of 1275 tcf (trillion cubic feet) (the estimated reserves in the US is 862 tcf).
In comparison, India holds technically recoverable shale gas reserves of 61 tcf in 4 out of its 26 sedimentary basins. The exploration of remaining basins to estimate the potential reserves is in process in partnership with the US Geological Survey. Some industry estimates are hopeful of reserves upward of 600 tcf within India.
India’s demand for natural gas is estimated to increase three fold within the next five years. Natural gas is also expected to be the preferred fossil fuel for power generation and as feedstock for petrochemical and fertiliser plants. In order to meet this shortfall in the immediate future, the Indian government is pushing for construction of more LNG re-gasification terminals along the western and eastern coast and also exploring the possibility of cross country pipelines to bring home natural gas from Central Asia. Neither option is however attractive as the current price of importing LNG is upward of US$ 14/ mmbtu (it has ranged from US$ 12 to 15 /mmbtu in the Asian markets) while the pipeline route is via geographically and politically challenging landscape. It is therefore imperative for India to aggressively explore and develop local resources, both conventional and shale gas reserves.
However, even increasing shale gas production is no less challenging. There are technological, regulatory, infrastructure and environmental hurdles that need to be crossed to leverage the potential of shale gas in India. It took the oil and gas industry in US over 30 years to achieve commercial success in shale gas production. While this time-frame can be reduced to replicate success in India, the government will have to be open and offer incentives to attract foreign investment in the sector.
Currently a key concern for international majors is the stability of the fiscal and pricing regime in the country. Additionally, acquisition of vast areas of land for commercial development will be among the biggest challenges. A typical shale gas development will be spread over 1000 sq.km. Many of the basins are in environmentally sensitive, densely populated or forest areas. In the US, since the landowners also earn a share of revenues from production of minerals under their land, land access becomes easier. The transportation and delivery of the gas to the end customers will be an expensive endeavor. Because India unlike the US, does not have the benefit of an existing extensive network of pipelines. Finally, the key challenge will be the consumption and contamination of water resources. Shale gas production is a water intensive process (because of hydraulic fracturing). The water consumption will be in direct competition to usage of water for agriculture and drinking. India faces a large gap between current supply of water and projected demand, amounting to a shortfall of around 50 percent in the next two decades. While advancement in technology is expected to reduce consumption of water for gas production, nevertheless a strong policy to reuse water will be essential.
The Ministry of Petroleum and Natural Gas released the draft policy for exploration and production of shale reserves in August last year prior to anticipated launch of the first licensing round in December 2013. While the final policy was expected by March 2013 it is yet to be released. The draft policy clarifies that the acreage will be awarded via an international competitive bidding process with 100 percent participation of foreign companies. The government has also proposed a new production-sharing agreement linked to production levels which will help simplify accounting procedures. However, there is little mention of potential fiscal incentives, which may be necessary to attract significant interest given the high uncertainty in the quantity and quality of the reserves. China, for example, has announced a new subsidy for operators linked to production of shale gas.
The biggest concern however is around land acquisition and water management. The draft policy states “Government of India will seek in-principle approval from the state governments concerned, prior to bidding, including facilitation in the matter of land acquisition and water management issues”. This could be a red flag to most companies who would wish to seek clarity on the process given the recent history of issues involved in land acquisition for industrial purposes. Further, the water management process seems to be lenient for the operators. The existing acts, which will be applicable, focus more on the process of disposal of contaminated water but not on either reusing or recycling. The draft policy states that river, rain or non-potable groundwater should be the preferred type of water with rainwater harvesting at site being mandatory but there is no broader thinking on optimizing water usage with competing objectives.
India needs gas to meet its growth targets. Given the lead-time to explore and produce hydrocarbon resources the short-term solution is to import gas. However, in the medium to longer term the higher cost of energy imports will only add to the fiscal deficit. Local production can help reduce the import bill but a clear and robust policy not just for the operators but also for all stakeholders will be the first step. The success of shale gas production is not a given and it may be early days to pin hopes on a shale boom in India. The final policy on shale gas is much awaited and so is its commercial production, which still looks 5 to 7 years away.