Shale gas: A game changer that India should turn to

by Bhamy V. Shenoy

Looking for trees and missing the wood may become applicable in the case of India's energy scenario.
So far India's relentless efforts during the last 25 years to build pipelines to bring gas from Turkmenistan, Iran, Qatar, Bangladesh and Myanmar have remained pipe dreams. Renewable energy sources like ethanol and bio diesel, wind and solar are high on the national agenda. Thanks to Indo-US nuclear pact, India may succeed in increasing the contribution of nuclear energy.

But a recent phenomenon of shale gas -- which has brought about seismic changes in the natural gas scene -- has not been given the importance it deserves. Energy economists all over the world have started to admire with awe the great achievement of oil companies in the US in developing shale gas resources on a large scale during the last decade.
As recently as three years back conventional wisdom was that US will have a huge gas deficit and it has to import increasing quantity of LNG. In less than two years, the US supply has changed from one of deficit to surplus. The sudden and unexpected development of shale gas has been a game changer. World renowned energy economist Daniel Yergin, chairman of Cambridge Consulting Group has referred to shale gas development as "the biggest energy innovation of the decade."

It is not that we in India are not familiar with this development. In an article few months back, columnist Anklesaria Aiyar had urged the government to bring about policy changes to promote shale gas.
In India, shale deposits are found across the Gangetic plain, Assam, Rajasthan and many coastal areas, but neither the government nor the corporate sector has carried out any exploration or estimation. Recently, ONGC announced plans to start a pilot project in 2011 when most oil companies in Europe and the US are racing to master the technology of shale gas from those companies who have already succeeded in the US.

Shale gas is natural gas produced from shale formations. Gas shales are organic-rich shale formations. In terms of its chemical makeup, shale gas is typically a dry gas primarily composed of methane.
Three factors have contributed to its rapid development of US gas shales: advances in horizontal drilling, advances in hydraulic fracturing, and, perhaps most importantly, rapid increases in natural gas prices in the last several years as a result of significant supply and demand pressures.

The primary differences between modern shale gas development and conventional natural gas development are the extensive uses of horizontal drilling and high-volume hydraulic fracturing. According to a recent DOE report, the use of horizontal drilling has not introduced any new environmental problems.
While unconventional gas sources like gas shales reserves are plentiful, cost to produce is more than the conventional gas production of yesteryears. The shale gas cost has been estimated to be between $ 6 per mm Btu to $ 9 to $ 10.

Dependence on Russia
The potential shale gasproduction in Europe will have huge geopolitical importance. Since gas prices are often higher in Europe than in the US, oil companies are keen on drilling for shale gas prospects even though profits at this stage are only speculative.
Europe is today dependent on Russia for its gas supplies to the extent of about 31 %. Future shale gas production may reduce this dependence on Russian gas supplies for Europe and improve their energy security.

In reality India's gas demand is limited by its access to gas supplies based on domestic production and imports availability. If India can produce more gas then it can reduce its coal imports which is environmentally more unfriendly, its gasoline consumption through the use of compressed natural gas, and its demand for LPG through piped natural gas to meet residential cooking and heating requirements, etc. Natural gas is a versatile fuel and more environment-friendly.
Unfortunately, Indian government has not been able to implement the right kind of gas policies even after the recommendations given by several high powered commissions. The current gas sector gives plenty of opportunity for rent seeking because of extensive government control.

Today we have three kinds of gas prices in India:
1. Gas prices based on Administered Pricing Mechanism (APM) for those gas reserves before new exploration and licensing policy. This is around $ 2.50/mm Btu.
2. Import prices paid to LNG imports which depend on international prices which were as high as $ 16/mm Btu last year and
3. The so called arms length price based on market for those gas reserves discovered after NELP. For the Krishna Godavari basin the government has fixed gas price at a level of $ 4.20/mm Btu on an arbitrary basis when the market based price would be above $ 6.50/mm Btu.

The basic requirement for proper gas sector development in India is that the government should allow the market to set the prices as recommended by many gas committees. The government should encourage Indian companies -- public sector and private sector -- to import gas shale production technology by giving incentives. It may even facilitate such transfer of technology through signing of cooperation pact with the US government as China has done during the recent visit of President Obama.
The government should consider setting a shale gas mission to make efforts to develop India's shale gas reserves on a war footing. In short, we should actively endeavour to develop shale gas reserves in India in the shortest time with all the human, geologic and financial resources we can assemble.

The writer is an energy expert.