Shale gas needs a Delphi exercise

This rich emerging source of gas has the potential to transform India's energy economy, but only if policy-making is closely coordinated between the various arms of govt and sector experts

The ministry of petroleum and natural gas is working on "a positive and forward-looking shale gas policy" that will be presented to the Union Cabinet soon. If the signals are to be believed, India will launch its first auction of shale gas blocks by end-2013.

The ministry has identified six basins for bids: the Cambay Basin in the west, the Assam-Arakan Basin in the northeast, the Gondwana Basin in central India, Krishna Godavari onshore, Cauvery onshore, and the Indo-Gangetic Plain. Shale gas is also believed to be present in the sedimentary basins of Rajasthan, Andhra Pradesh and the Damodar Valley. Though all shale deposits are not ideal for exploration, a substantial potential for gas is expected to be present in these basins.

According to preliminary estimates, India's shale gas reserves may be larger than that of its conventional gas deposits. According to US Energy Information Administration estimates, India has approximately 290 trillion cubic feet (tcf) of shale reserves, of which nearly 20 per cent is technically/economically recoverable. Currently, India's gas-fuelled power plants total around 18 gigawatt, running at about 40 per cent capacity owing to a shortage of gas. By 2016-17, the demand for gas is expected to reach 122.42 tcf. Unfortunately, even in the best-case scenario, domestic production will only yield about half the total requirement. India will definitely have to look to bridge this gas demand-supply mismatch. Shale gas, considered the "biggest energy innovation of the previous decade" and a "game-changer" by several economists around the world, belongs to the category of unconventional reservoirs that include coalbed methane, tight gas (gas that is difficult to access because of the nature of the surrounding rock and sand), and gas hydrates. It has resulted in a change in the energy dynamics of the US from "one of deficit to surplus" in less than two years.

This vast resource can be developed in stages, which means the pace of development can be controlled - matching production with economic conditions and market demand. Shale gas also has short cycle times between initial investment and first production, and is readily available.

In India, the knowledge base about shale gas and related technologies is still nascent. It needs an effective policy framework for the exploration and exploitation of its shale gas blocks. There has been little development in this segment so far in the country. India has been aiming to import shale gas from the US. US gas, once available in the market, is expected to create a certain degree of moderation of international gas prices.

The US has recently allowed state-owned GAIL (India) to ship shale gas to India, making an exception to its restrictive export policy. GAIL (India) has also allied with French group EDF to jointly scout for natural gas assets in the US. GAIL (India) also acquired a stake in Carrizo's Eagle Ford Shale acreage in south Texas for Rs 500 crore.

Then again, state-owned Oil and Natural Gas Corporation, or ONGC, has launched an experimental project in the Damodar Valley basins to test-flow shale gas and learn about proprietary technologies. It has also signed a memorandum of understanding with ConocoPhillips to jointly explore and develop shale resources in India.

Such forays will provide Indian companies the much-required exposure to the shale gas business. This can be leveraged at the policy level to encourage and attract greater foreign and domestic investment.

Perhaps the biggest challenge related to shale gas development is environmental implications, which are primarily water-related. Hydraulic fracturing used in the exploration and production of shale gas can contaminate ground water. Mishandling waste is another concern. Disquietingly, the spent water contains chemical residues and traces of some radioactive elements that occur inside geological formations.

Further, pumping chemicals into the ground (through surface retention ponds) carries risk of ground water contamination and has also been alleged to induce seismic activity. Some shale types might contain high amounts of radioactive compounds, such as radon gas, uranium and uranium-238. These shales might also contain enormous amounts of carbon, making it highly combustible. After the Bhopal Gas catastrophe in 1984, the government will have to tread carefully between fiscal policy and environmental stipulations.

In India, unlike in the US, owners have only superficial geological rights, and the mineral resources belong to the government. This leads to an unequal development of common facilities required in the sector. For example, the US has a well-established and connected pipeline system stretching across millions of kilometres, unlike India, where we have only a few thousand.

A number of alternative gas reserves in India are inhabited, and securing drilling rights could be a challenge. Apprehensions that shale plays will produce a land-grab business model, in which hundreds of thousands of acres are acquired by companies, are justified, especially when shale gas requires a minimum land holding of 80 to 160 acres.

Addressing issues that concern drilling rights and providing a free hand in the marketing of alternative gas can attract investments in this sector. Also, the freedom to market and price, which is restricted by current regulations, could act as a positive catalyst. India follows a priority sector gas allocation and pricing policy. The priority accorded to sectors decreases from fertiliser to power to LPG to city gas distribution. The shale draft policy, in line with the prevailing New Exploration Licensing Policy guidelines for crude oil, has suggested freedom to market shale gas within India on an arm's length basis (i.e. companies share profit with the government only after recovering all their investments). The combination of fixed (subsidised price) and variable components (reflecting market price) for pricing could be an ideal way forward. This change might also revive old wells that have been declared commercially unviable.

Other key considerations are government assistance to public and private companies in securing shale gas technology, a supportive external environment for overseas acquisitions and strategic tie-ups, incentives, investment in technical know-how, and a conducive economic environment for foreign participation. Strategic tie-ups with countries, such as the US, Australia, Russia, Europe, and China, which use advanced technologies and tested business models in the shale gas industry, will help India develop its shale reserves.

True, the new legislation will provide the necessary importance to the shale gas phenomenon and the seismic changes it has brought into the natural gas scenario. There, however, remains an ardent need for coordination with the environment and other ministries concerned. Moreover, public acceptance is paramount to the success of shale gas projects in India.

We see the need for a Delphi exercise, where experts from diverse fields, including environmentalists, economists, and policy-makers, sit together and create the right strategies. Shale gas definitely presents an opportunity and, if harnessed effectively, can bring about a change in the country's energy mix, furthering the cause of its energy self-reliance.

The author is a senior analyst in Evalueserve's energy practice
Although the information contained in this article has been obtained from sources believed to be reliable, the author and Evalueserve disclaim all warranties as to the accuracy, completeness or adequacy of such information. Evalueserve shall have no liability for errors, omissions or inadequacies in the information contained here or for interpretations from it
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