The ministry of petroleum and natural gas has released a draft policy for the exploration and exploitation of shale oil and gas. The draft is to be fine-tuned after feedback has been received from citizens, concerned parties, experts, stakeholders and so on. This will hopefully result in a finalised shale policy by April 2013, and the first auction of shale blocks by December 2013, which will not be a moment too soon. The “shale gas revolution” has transformed the North American energy basket; given India’s widening energy demand-supply gap, there is an urgent need to explore this new, non-conventional source. In April 2011, the US’ Energy Information Administration assessed risked gas-in-place of 290 trillion cubic feet (TCF) with technically recoverable resources of 63 TCF in four of 26 Indian sedimentary basins. Several Indian energy majors have started exploring shale joint ventures abroad in order to develop technical competency.
It is clear from the draft policy that at least some lessons have been learnt from the multiple awards under the New Exploration Licensing Policy (Nelp). The draft abandons the Nelp model of cost recovery and profit-sharing, which has been at the heart of the contention over Reliance Industries’ KG-D6 block. Instead, bidders will be asked to quote a percentage of output to share with the Government of India at different production slabs. This sidesteps some accounting issues and reduces the temptation to gold-plate expenses. The government’s share will be net of statutory dues. As with coal bed methane (CBM), ad valorem royalty for shale oil and gas will be paid to states, while production-linked payments will go to the Centre. Importantly, delays in clearances – marked in the KG blocks – might be reduced. An empowered committee of secretaries will ensure all necessary statutory and regulatory clearances are obtained before bidding. Approval from the states concerned on land and water management issues will also be obtained before bidding.
Unfortunately, certain key issues have been left unclear. Shale exploitation has huge environmental implications. It involves horizontal, multi-well drilling and the injection of up to 15 million litres of water per well to fracture rock. The water can resurface contaminated and may poison aquifers. While the draft holds out the assurance that “fracking” will be in line with the Water (Prevention and Control of Pollution) Act, 1974, the National Environment Policy, 2006, and so on, it doesn’t lay down norms. The environment ministry will have to work overtime to determine acceptable waste management norms and to create a panel of agencies competent to carry out environmental impact assessments. In case a shale block overlaps an existing oil and gas block, or CBM block, the existing operator will be offered the right of first refusal to match any shale bids — or, alternatively, to enter agreements for simultaneous exploration. However, shale oil is exempted from cess. In such cases, it will be difficult to distinguish shale from conventional oil.
Another highly contentious issue – that of shale gas pricing – remains worryingly opaque. Operators will have the “freedom to market shale gas within India on arm’s length basis within the framework of the government’s policies on marketing and pricing of gas”. How much freedom does this actually give operators? The ambiguity leaves ample potential for disputes and litigation. Also, only the outlines of the model contract have been stated — here, too, the devil is likely to be in the details.