Companies want allocation, price clarity in shale gas policy

Oil and gas exploration companies like British Gas and Essar Energy want clarity on pricing and gradual linkage to international price for making shale gas investments. After Reliance Industries Ltd (RIL)’s experience with the D6 gas allocation, some also suggested the government should not have an allocation policy for shale gas. Other critical issues highlighted by the companies relate to land acquisition, water availability and handling. These companies submitted their comments to draft shale gas policy last month.

The government is looking to launch the first shale gas auction by December 2013 and is working on the policy that could be finalised by year-end. Hydrocarbon found in the form of shale gas has, over the past few years, transformed the energy scenario for the world’s biggest energy consumer, the US. RIL, India’s largest private oil company, has acquired shale acreages in the US. China will soon launch a second round of shale gas auctions and is targeting 6.5 billion cubic meters of annual production by 2015, from close to none this year.

BG India, which has a 30 per cent interest in Panna Mukta and Tapti fields, has suggested the government needs to bring clarity on pricing policy for shale gas. “The risks for the prospective investors continue to be high. It is required that fiscal regime and pricing mechanism are attractive for the prospective investors to bring in capital and technology and undertake exploration. Current regulated gas price is below some international markets prices. Definition of clear path to international pricing is important to create investment friendly environment. The pricing should be arms length, market-driven and linked to international crude oil,” it has said. The arm of the UK-headquartered group has also suggested that the policy “should not permit allocation of domestically produced shale gas”.

Pricing of gas has been a concern among exploration companies like RIL that operates the KG D6 block. RIL currently realised $4.20 per million British thermal unit of gas and is seeking a threefold rise so that prices reflect the global trend. The price of gas from the country’s biggest gas discovery has been frozen till March 2014.

Essar Energy, which has the largest coal bed methane (CBM) acreage in India, is also for a market-linked shale gas price. “The government will need to incentivise shale gas production by bringing in a market-related pricing for the gas, taking into account the cost of alternative fuels or sources. Investors need to have a clear idea of pricing before committing to projects. There must be a policy of ensuring smooth and timely approvals in all aspects of the project,” says Iftikhar Nasir, chief executive officer (exploration and production) at Essar Energy Plc.

The draft policy does not provide for a cost-recovery in shale gas project to discourage gold-plating. However, oil industry body Petroleum Federation of India has suggested that due to its cost-intensive and risky nature, shale gas exploration may be provided cost recovery with a cap of around 40 per cent to attract investment. Under cost-recovery in conventional oil and gas exploration, investments made by the operator are recovered from revenues generated. There is no such cost recovery in case of CBM exploration where companies like Essar, Oil and Natural Gas Corp and Great Eastern Energy operate.