A recent global report cautiously states that although many countries want to replicate the US shale gas model, they must first overcome technical, geological and service capabilities. Is shale really the next big thing for India, or do the hurdles make it too early to rejoice about? Rakesh Kumar Jain analyses.
After a long wait, the Government of India issued the policy guidelines for exploration and exploitation of shale gas and Oil by National Oil Companies (NOCs) under nomination regime. It means only the National Oil Companies such as ONGC and OIL shall be able to get into shale gas play in India in the near future. Going forward, the Directorate General of Hydrocarbons, the Oil Ministry´s technical arm, has proposed to offer areas for shale gas exploration on royalty and production-linked payments to the government.
These policy announcements are certainly welcome, for shale gas has emerged as the next big thing in the natural gas industry. In the US, substantial volumes are being produced from the Bakken and Barnett formations and the US Geological Survey indicates that the potential is massive. Many analysts believe that shale gas could account for ~20-25 percent of total US natural gas production in the years to come, resulting in that country´s self-sufficiency in gas. Efforts are on in China as well to tap into the potential, through technology sharing with the US.
Baby steps Based on the multiples for unconventional gas in US, estimates for recoverable unconventional gas in India could range around 5-10X of the on-shore gas reserves ie, 55 to 100 trillion cubic feet (tcf). Various studies have estimated recoverable reserves of shale gas at between 6 tcf and 63 tcf. There has been variation in the figure of estimated reserves, but no one can deny its presence in India.
The shale gas policy will be rolled out in phases. In the first phase, only PSUs ONGC and OIL will be permitted to explore for shale resources in the conventional oil and gas onland blocks that were allotted to the two firms on a nomination basis before the New Exploration Licensing Policy (NELP) in 1999.
NOCs shall apply for grant of shale gas and oil rights in their interested PEL/PML acreages and will be required to undertake a mandatory minimum work programme (MWP). They will be permitted three assessment phases of a maximum period of three years each. Royalty, cess and taxes will be payable at par with conventional oil/gas being produced from the respective areas.
While the private sector players have been far from pleased from the extant policy guidelines, it seems that government has taken a cautious baby step to test the water on the Shale gas play dynamics in India. According to the experts, there has been a setback to many private and public sector players who expectedly had an ambitious game plan for shale gas play in India.
In the recent past, both Reliance Industries Limited (RIL) and GAIL has acquired equity stake in shale gas play in the US but they were not able to apply their technical credentials in India for the time being. The government seems to have taken a guarded approach in opening up the sector in order to understand the dynamics, issues and challenges in the shale gas play, especially keeping in mind the issues in water and the environment. The Indian O and G sector is also facing both regulatory and pricing uncertainty and opening a new front for private sector without settling the prickly issue may boomerang. These issues and challenges Government might also have at the back of their mind which could have led to guarded approach for first few years.
The government also plans to extend, albeit with a few stringent conditions, the recently approved shale exploration policy which allows only state-run ONGC and Oil India to explore shale resources. The ministry has proposed automatic extension of lease period in blocks held by private companies if they are interested in exploring shale oil and gas. But only such blocks will get extension where the lease will expire after two years. However, exploration companies are not too pleased with this condition for extension and raised the point of view on the definition of ´period´ of two years. The Private players seem to be unclear on the purpose of the government as whether the Government wants to encourage exploration or wants to restrict it. However, the government justified the cut-off date to avoid the misuse of shale exploration policy.
According to the government, the cut-off date is a must so that private operators do not give the excuse of shale exploration to extend their lease periods. Blocks where the lease period will expire in less than two years will be re-auctioned after the expiry of the licence under the unified exploration policy.
Cost hurdles For shale play to succeed in India, there is a need for both technological advancement specially in hydro-fracturing (´fracking´) and market pricing of gas. The recent hike in gas pricing by the government is expected to incentivise the shale gas play in India; however, the new land acquisition law may be a bit dampener in view of the complexities involved. Horizontal drilling as against vertical drilling will reduce the requirement of land. The high density population area coupled with propensity of agriculture land may become an issue for shale play in India.
The biggest challenge in the way of commercialising shale gas at relatively low costs in India ($4-6/mmbtu) would be access to cheap technology. Indian players would have to import supply chain (including rigs, platforms) leading to higher costs compared to US. Also in the initial years due to relatively small scale, OFSEs services would be costly and lack of experience in exploring shale gas in India could lead to high cost of production. Low cost gas pricing issue is expected to be sorted out as Government of India has decided to increase the gas price from current level to ~USD/mmbtu 8.4. Currently the shale gas price prevailing in the US is between 3-4 USD/mmbtu. Primarily, the gas production is from the gas beds which are ´wet´ wet wells produce natural gas liquids (NGL) such as ethane, propane and butane. These hydrocarbons are valuable for making plastic in petrochemicals plants or for industrial and domestic uses. Gas, under such circumstances, becomes the by-product and major revenue is generated by sale of NGL which is linked to crude oil price. Experts believe that gas production from such wet shale beds would start tapering out in future and the gas price in the US may increase from the current level. Experts hope that export of LNG from the US from 2016-2017 may impact the Asian LNG price which is highly linked to crude oil prices.
It is believed that world energy economics may be impacted in case US starts exporting reasonable amount of gas to the word market.
Shale gas business requires a different operational approach from that in conventional gas drilling. In conventional gas business the cost of failing is very high, and so every well must be correct. In comparison, shale gas is a manufacturing-like process with a factory approach. The recipe for success is to continuously reduce operational costs, improve technology to identify geological patterns and strike thick and vast stretch of gas at relatively low depth. The combined effect of the learning curve on technology and operations and reduction of development costs could further reduce costs for shale gas by 30 per cent in the US.
In addition there are environ¡mental concerns around excessive consumption of water and potential risk of contamination of ground water supplies which could come in way of accelerated development of shale gas.
Solutions exist, but they would increase the cost of overall operations. It is believed that in due course, the technological innovation and increasing level of R&D may germinate environment friendly solutions requiring quite a less amount of water. Such development would really be a boon for the water scarce country like India. Some experts also have argued that the Indian subcontinent or the geography of Indian subcontinent is not very conducive for shale gas drilling. There is too much of water and the lay of the land is not smooth. There is a need for a large quantity of water, 2 to 3 million gallons per hydro-fracture and each well will need between two and 30 stages of hydro-fracturing, but the industry is working, the R&D companies worldwide are working in seeing this first of all how to use and recycle this water which is used for fracturing, and can it be reused. The companies which are working in R and D are also seeing the possibility of aqua-less hydro-fracturing that means without use of water, using solvent or something. It is hoped that such issues shall be sorted out in due course. A few experts have also raised a concern of occurrence of minor earth quakes due to fracking, but nothing conclusively has been proved.
India could see some perceptible development in the shale gas play in next 3-5 years since India needs energy from all sources.
Where shale lies As per available data, six basins Cambay (in Gujarat), Assam-Arakan (in the North-East), Gondwana (in central India), KG onshore (in Andhra Pradesh), Cauvery onshore and Indo-Gangetic basins hold shale gas potential.
Recoverable reserves of shale gas in India are estimated at 63 tcf. Recoverable unconventional gas overall could be up to 100 tcf. Horizontal drilling in shale gas, as against the conventional vertical drilling, will reduce the requirement of land.
The author is Associate Director, Feedback Infra Private Limited. Views are personal.