The ministry of petroleum and natural gas' recent proposal to the Cabinet Committee on Economic Affairs (CCEA) regarding the development of shale gas and shale oil raises more questions than answers. In a nutshell, the proposal accords the same status as conventional hydrocarbons to production from shale gas and shale oil. This would mean that the upstream national oil companies (NOCs) ONGC and Oil India would avail of income tax and customs exemptions as well as pay royalties of 10 and 20 per cent respectively on any shale gas and shale oil that they produce, much the same as oil and gas from nominated conventional oil and gas blocks. Also, production from shale formations will realise the same prices as conventional production.
Where the proposal does differ in the treatment of conventional and shale resources is that in the case of the latter, NOCs will have to submit a minimum work programme and a field development plan, failure to abide by which would result in significant financial penalties. Prior to sending the proposal to the CCEA, a Memorandum of Understanding had also been agreed between the ministry and the Department of Energy in the US that envisioned joint assessment of shale resources in India, with the US imparting training to Indian geoscientists and engineers and providing guidance on developing an appropriate regulatory framework for shale resources.
This decision, coming on the back of the CCEA's recent nod to the increase in gas prices looks like a progressive move towards better utilisation of India's hydrocarbon resources. It is encouraging to see that the government is taking cognisance of the immense potential of shale resources, albeit belatedly. The "shale gale" has had a completely transformational effect on the US energy landscape, and has also significantly impacted global markets for coal, natural gas and liquefied natural gas and to a lesser extent, crude oil. Since 2008, the year when volumes from shale oil and gas first spiked significantly in the US, production from shale resources has boosted US dry gas output by almost 25 per cent to 65.59 billion cubic feet per day in 2012. Similarly, US oil production has increased by an average of 500,000 barrels per day (bpd) in each of the last five years since 2008, with the highest increase coming last year at 760,000 bpd. The majority of that increase has been driven by "tight oil" production from shale formations.
Scratch deeper, however, and one finds that the ministry's proposal sheds no light whatsoever on how the very real and sizeable impediments to shale resource development will be tackled in a country like India. Let's start with resource size. The US Energy Information Administration's 2013 study titled "Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States" does not rank India inside the Top 10 nations in terms of technically recoverable reserves (TRR) of either shale gas or shale oil. According to the report, India's unproved TRR of shale oil were estimated to be 3.8 billion barrels. Similarly, the unproved TRR for shale gas stands at 96 trillion cubic feet (tcf). Contrast that with Argentina, a top five country in the report for both shale oil and gas, where the corresponding figures are 27 billion barrels of oil and 802 tcf of gas. Argentina's state-owned energy champion YPF signed a $1.24-billion agreement with oil supermajor Chevron in July 2013 to tap the shale resources of the Vaca Muerta ("Dead Cow") shale formation in the Patagonian plateau. In other words, India's shale formations are far from world-class.
Let us assume that India's reserves and its geology - shale formation heterogeneity, rock porosity and consequently well productivity - all lend themselves favourably to commercial extraction of shale resources. Does our upstream energy sector have an ecosystem that will be able to successfully harness this bounty? The short answer is no. A close examination of the shale revolution in the US reveals that a number of factors, a few of which are unique to that country, have played a major role in bringing prodigious quantities of shale oil and gas on stream. These include a liberalised pipeline system that has been allowing third parties access for the last four decades; a deep and liquid financial market in oil and especially gas, allowing smaller and medium-sized producers to use financial tools to hedge the risk of volatile prices and lock in viable prices for the hydrocarbons they extract; perhaps the deepest pool of capital in the Western world - US institutional investors; a drilling and oil services industry large enough to provide the rigs, qualified engineers and entrepreneurs (indeed, the leaders of the US shale revolution have not been the supermajors but mid-sized firms and independents such as Hess, Chesapeake Energy, Continental Resources and Whiting Petroluem) who were able to exploit the opportunity that hydraulic fracturing or "fracking" threw up; the only land rights system in the world that gives the owners of land ownership of the minerals and hydrocarbons that lie underneath it; plenty of empty space and large areas that are not densely populated (such as the Barnet and Haynesville shale formations in Texas) to allow drilling for oil and gas; domestic production and abundant supply of proppant and other mineral sands (pumped into rock seams to push the oil and gas out); and, finally, access to plenty of freshwater (a typical producing well requires some three million gallons of freshwater). How many of these conditions does India provide?
As an economist by training all too familiar with India's current account woes that led to the balance of payments crisis of 1991, and with the rupee trading at record lows against the dollar, I would be happier than most to see a desi shale revolution along the lines of the US that would significantly ease our import bill, and light up the many thousand megawatts of gas-fired power generating capacity that now lie idle in India. But sitting in the nation's capital, the hard-hosed commodities trader in me is convinced that this may be a distant dream, at best.
The author is a private energy trader based in Asia. He can be contacted at ibh@cubyira.com
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