Shale Gas: The answer to India's energy woes - Views on News from Equitymaster

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Shale Gas: The answer to India's energy woes

Jun 17, 2011

The natural gas landscape in India

Indian gas energy landscape is on the verge of a turn around. Amidst the concerns like reducing natural gas supplies from domestic basins, shale gas prospects have emerged as a silver lining. With a 17% share in gas production , it has turned US from a gas importer to net exporter. No wonder that Shale gas is seen as the next gamechanger in the gas energy sector.

Recent developments

It all started with Reliance (RIL) making a claim in U.S shale gas assets last year. Within a year, the country has seen dramatic corporate moves in this field. Even public sector firms have entered contracts with foreign firms to exploit this asset. Some that deserve a mention are Gujarat State Petroleum Corporation (GSPC) that is upbeat on producing shale gas from Cambay basin, ONGC for its success in exploiting shale reserves, GAIL that is set to bid for 20% stake in two shale gas assets in US and OIL that plans to spend huge chunk of money just to test the feasibility of shale gas in India.

Looks like finally the government is waking up to the enormous potential that exists here. The country has signed a MoU with the US for locating and tapping shale gas. It has already identified six basins holding the gas. Shale gas reserves in India are now estimated somewhere between 300 and 2,100 trillion cubic feet (tcf) (in comparison to proven reserves of just 7-8 tcf for Reliance's KG D6 field). It further plans to auction shale gas blocks before the end of this year.

Catalysts

Recently, the activity was taken to a different level. The Government took some steps that reflect some flexibility and regulatory sense. One of the most significant ones was raising APM gas prices. Such maiden steps raised hopes that shale gas in the future could become a viable business. Besides, the escalating price of imported LNG coupled with decline in KG D6 basin, have forced the major players to explore this option.

So what is stopping us?

Like every other sector, this area suffers from lack of right policies. That is the prime reason why despite large reserves across Gangetic planes and in Rajasthan and Gujarat, no significant exploration was done. As of now, the bidding for conventional sources is different from non conventional ones. The companies have no incentive to make the shale gas (not covered under exploration license) discoveries public since they will not be allowed to extract it as per current policies. The new shale gas policy should incentivize companies that are developing conventional resources to look for and develop shale resources as well. This would require a digression from our existing NELP.

Shale gas exploration is fraught with environmental hazards. Hence, the Government should work on measures that promote investment without posing risk to the environment. A lot of promising industrial projects have not seen the light of the day due to leasing and land acquisition hurdles where the interests for the local population clash with the developer. This needs some rules in place that ensure a fair compensation to local population to avoid friction.

Apart from right policies, there are technical issues that need to be sorted. One of the very basic issues is a reasonable estimate of existing reserves. Once we are sure about that, we can scout further for the kind of investment and technology needed to monetize the assets.

Viability: the price pinch

Shale gas is without a doubt the smoothest option for the long run. Once the initial investment and technology is in place, it is easy to extract and transport. However, it is viable only when gas prices trade at US$6-8 per mmbtu . The whole thing can turn out to be a damp squib if natural gas prices are kept artificially low. There will be no incentive, either with domestic or international majors to invest in highly capital and technology intensive option . To give this pioneer industry a smooth take off, tax incentives should also be considered

The parallel implications

In U.S, cost of shale gas projects has come down to make them viable at half of the prices that were prevalent four to five years back. Following the economies of scale principle, the same will be true in India as well if shale gas becomes a reality in the coming future. Estimated to cost around US$ 6-US$ 9 per mmbtu, shale gas will be way better than LNG gas supply from Iran or Qatar that costs around US$ 13 per mmbtu. It may turn out to be a variable that empowers India's status in global energy equation. It can also make contracted prices for TAPI pipeline inhibitive and render it a sunk investment. Or, who knows if India becomes a net exporter rather than importer for natural gas?

To conclude...

All the promises aside, shale gas revolution in India needs a major overhaul in the energy policies . The latter has never been a smooth task for the government . These reserves have been present since ever in the country. It's pure common sense that their existence is not sudden revelation for the companies. However, the reserves have remained unharnessed because the companies have no incentive to put in efforts to develop them further. No wonder that the companies like Reliance and GAIL choose foreign lands over domestic to tap such resources. To summarize, the need of a gas policy is imminent else shale gas prospects will remain a distant mirage.

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3 Responses to "Shale Gas: The answer to India's energy woes"

Phani

Jun 20, 2011

Not many people know the perils of gas exploration. Its filled with environment hazards. Fracking etc are not good practices particularly in countries like india where people have not enough clean water to drink in the first place. Its better to import as much as we can. we already have very limited forests and clean water dont reduce it further for greed of gas and oil. Dont trust me.. go and see HBO's documentary called "Gas Land" about the pollution these natural gas companies are causing in USA.

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Sundar

Jun 19, 2011

We had seen enough of these announcements. RIL's KG basin was talk of the decade and now what happened again industries are suffering want of gas. I am not sure where did you get the figure of USD 13$/mmbtu for LNG. These prices are spot cargo prices. Why RIL is going to USA, because it is available there. Why RIL is not investing in India for shale gas, because it is uncertain on account of availability not on account of prices.

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Manish

Jun 19, 2011

Every hurdle in indian economic development ends up in only few reasons
1) Right gov policies
2) Powerful regulatory frameworks
3) Will and skills of political leaders, executing machineries.
4) Public participation and conviction of long term vision in India growth story of public
5)Collective will of the public put control of this country in to right hands.

Otherwise nature has given us more then waht we want and we need. we can excell in every thing, if we aspire and inspire properly the peopl of india.
Thanks.

I liked this aritcle very much.
Good job by EM keep it up.

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