India would have made greater progress in its fight against poverty if only she had succeeded in securing greater access to energy sources. If it is domestic energy source then it would be even better.

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 would have a huge gas deficit and it would have to import increasing quantities of LNG. 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.'

India is likely to miss one such important source of energy from its potential shale gas reserves if she did not change her gas sector policies.

In India, shale deposits are found across the Gangetic plain, Assam, Rajasthan and in the coastal areas. Neither the government nor the corporate sector has carried out any exploration nor estimation. Recently ONGC has announced plans to start a pilot project in 2011 when most oil companies in Europe and the US are already racing to master the technology of shale gas from those companies who have already succeeded in the US.

What is shale gas?

Shale is a sedimentary rock that predominantly comprised of consolidated clay - sized particles. Shale gas is natural gas produced from shale formations that typically function as both the reservoir and source for the natural gas. In terms of its chemical makeup, shale gas is typically a dry gas primarily composed of methane. Gas shales are organic - rich shale formations.. As early as 1821, shale gas was produced near New York for street lighting. Since the quantity was small such production was stopped later because of poor economics.

According to a report (published in April, 2009) by US department of energy (DOE) on shale gas, three factors have contributed to its rapid development:

     1. Advances in horizontal drilling.

     2. Advances in hydraulic fracturing and, perhaps most importantly,

     3. Rapid increases in natural gas prices in the last several years as a result of significant supply and demand pressures.

Modern shale gas development is a technology - driven process for the production of natural gas resources. Currently, drilling and completion of shale gas wells include both vertical and horizontal wells. Shale gas operators are increasingly relying on horizontal well completions to optimize recovery and well economics. Horizontal drilling provides more exposure to a formation than does a vertical well. This increase in reservoir exposure creates a number of advantages over drilling vertical wells. Six to eight horizontal wells drilled from only one well pad can access the same reservoir volume as sixteen vertical wells.

Evolving technology...

The other technological key to the economic recovery of shale gas is hydraulic fracturing, which involves the pumping of a fracturing fluid with fine sand under high pressure into a shale formation to generate fractures or cracks in the target rock formation. To keep the cracks open, some operators may mix in 'proppant,’ such as little ceramic spheres. This allows the natural gas to flow out of the shale to the well in economic quantities. Each hydraulic fracture treatment is a highly controlled process designed to the specific conditions of the target formation. This is not rocket science. By trial and error method, experts have already found drilling techniques to optimize gas production. Technology is still evolving and each shale formation may require its own specific techniques to get maximum prodcutivity.

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 US DOE report, the use of horizontal drilling has not introduced any new environmental problems. In fact, the reduced number of horizontal wells needed coupled with the ability to drill multiple wells from a single pad has significantly reduced surface disturbances and associated impacts to wildlife, dust, noise and traffic.

Small independent enterprises in the forefront

It was smaller independent enterprises in the US which have been on the forefront of developing shale gas technology. As far back as 1981, it was Texas wildcatter George Mitchell who first drilled horizontal well and experimented with fraccing to produce gas from shale gas. In December 2009 ExxonMobil, instead of depending on its experts to develop the technology which it was fully capable of, decided to buy an independent company XTO for a total investment of $41 billion to get access to potential shale gas reserves of 1100 bcm and its talented pool of geologists, drillers and production engineers.

European companies ENI of Italy and Statoil of Norway have implemented a similar strategy by taking interest in the US independents, Quicksilver Resources and Chespeake Energy respectively which have substantial holdings in shale gas reserves. While the European oil companies are getting access to shale gas technology, US oil companies like ExxonMobil, Devon Conoco have started to lease acreage in Europe. According to a New York Times article, early estimates of recoverable European shale gas resources range up to 11,000 bcm, less than half the industry's estimates of what is recoverable in the United States.

While unconventional gas sources like gas shales reserves are plentiful, cost to produce it is more than the conventional gas production of yesteryears. The ball park estimate of long term cost to produce gas on a full cost basis to give about 10 per cent rate of return is around $6.00 per million British thermal units (mmbtu). However, some analysts have estimated a much higher price of $ 9 to 10 per mmbtu. Unlike conventional gas wells where gas production declines slowly between 5 per cent and 9 per cent , shale gas wells may see decline of 50 per cent to 60 per cent per year.

The potential shale gas production 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 per cent. Future shale gas production may reduce this dependence on Russian gas supplies for Europe and improve their energy security.

Big jump in reserves….

According to The Potential Gas Committee of the US, estimated US natural reserves increased almost 40 per cent between 2006 and 2008 due to shale gas technology. The US is now estimated to possess 52,000 bcm of gas reserves, 33 per cent of which is related to shale gas that no one knew how to extract economically as recently as two years ago. In less than two years, the US supply has changed from one of deficit to surplus.

The total recoverable US gas resources in four new shale gas fields, the Haynesville, Fayetteville, Marcellus and Woodford, may be over 16,000 billion cubic metres(bcm). In comparison India's proven gas reserves at the end of 2008 is 1090 bcm. While the US gas consumption was 657 bcm in 2008, India's gas consumption was limited to 41 bcm. India's integrated energy policy report forecasts gas demand of 100 to 197 bcm in 2031-32.

The potential in India

In reality India's gas demand is limited by its access to gas supplies based on domestic production and imports. If India can produce more gas, then it can reduce its coal imports which is environmentally more unfriendly, reduce its gasoline consumption through the use of compressed natural gas and also reduce its demand for LPG through piped natural gas to meet residential cooking and heating requirements, etc. All these will drastically reduce the import bill on crude and LPG. Also natural gas is a versatile fuel and is more environment- friendly.

Unfortunately, Indian government has not been able to implement the right kind of gas policies even after sensible recommendations given by several high powered commissions.

The pricing factor…

Today we have three kinds of gas prices in India:

1. Gas prices based on Administered Pricing Mechanism (APM) for those gas reserves mostly owned by public sector companies ONGC and Oil India Ltd and also before New Exploration and Licensing Policy. This is around $2.50/mmbtu.

2. Import prices paid to LNG imports which depend on international prices and the so called arms length price based on market for those gas reserves discovered after NELP. These prices were as high as $16/mmbtu.

3. Though the third category of price is supposed to be market - related, we have seen the difficulty of following it when the dispute involving Krishna-Godavari basin gas finds by Reliance Industries Ltd arose.

Environmental issues…

There could also be potential environmental problems associated with shale gas production. For fracturing process, water is required in huge quantities which is mixed with chemicals to improve the gas flow. There is every likelihood of this water mixing with sub surface water streams used for household uses. The US DOE report which has taken a look at this problem had concluded that shale gas has no significant impact on the environment. Of course this could be true in the US where environment regulations are strictly implemented and adhered to. But in India where such strict implementation is still not a practice there could be a problem.

One can argue that there are many uncertainties regarding the potential of shale gas production, economics and potential impact on environment. However, when one considers how aggressive and successful gas shale development can add to Indian gas reserves and support higher gas production, it is worth attempting to implement the needed policy changes on a war footing. According to an expert S S A Aiyar, oil companies are not allowed to harness shale gas reserves when they find them while exploring for oil. The government thinks that such finds are windfalls to the companies and they should have special licence. This convoluted logic only shows lack of understanding of oil and gas exploration on the part of our bureaucracy.

Need for liberal, market -oriented policy
The government should not impose priorities for gas sector and control where gas is utilized. The production sharing contracts signed after NELP allows such control. Once market is allowed to set the gas price, there is no reason to impose such priorities on producers. In case the government wants to encourage gas consumption in some sector, say in residential market or the transportation sector to promote environmental protection or such national needs, it may take recourse to other fiscal policies to favour one market over the others. However, this should be attempted only as the last resort.

Government should encourage Indian companies -public sector or private sector - to import gas shale production technology by giving incentives. It may even facilitate such transfer of technology through signing a cooperation pact with the US government as China has done during the recent visit of US President Obama to that country.

Set up a shale gas mission

The government may even consider setting a shale gas mission to make efforts to develop India's shale gas reserves on a war footing. The government may invite NRI professionals from the USA working in shale gas projects and who have gained expertise. If the right kind of incentives are given such talent could be attracted. It may be appropriate to recall how Nehru succeeded in attracting outstanding talent to start the nuclear establishment in India after Independence.

We should actively endeavour to develop shale gas reserves in India in the shortest time with all the human, geological and financial resources we could assemble.