The year that has just ended was witness to the emergence of four major gamechangers in the world of hydrocarbons. They were shale gas, rising non-OECD demand for energy, the accident in the Gulf of Mexico (BP?s deepwater well) and the rise of Iraq on the supply side. Shale gas, however, has had, so far, a more dramatic effect both on the supply and price of gas as well as the geo-strategies of the western world.
The US provides an example of a nation that, almost overnight, became a gas surplus country. Their existing LNG receiving terminals are being mothballed and the start up of new ones are being kept on hold. Gas prices locally have steeply fallen, impacting LNG prices worldwide. The largest LNG producer in the Gulf is forced to hawk it at a price that barely covers its processing costs. Even though shale gas is yet to come up in Europe, Russia and China, feverish drilling has commenced in Europe, wanting to free itself from the whimsical Russian supplies. Similarly, the US view of the Middle East as a major supply source of its fuel could change and thus influence its geo-political perspective of the region.
Many parts of the world have rock formations with extractable shale gas. North America alone is estimated to have 900 trillion cubic feet of recoverable shale gas. Several parts of Europe, too, have considerable reserves about to be extracted. One study of world potential estimates 688 shale formations in 142 basins. It is the development and deployment of the hydraulic fracturing technology that has rendered shale gas commercially viable. Though categorised as an unconventional gas, it is going to overwhelm conventional gas in the near future, if the current rate of exploitation is maintained.
The question that naturally arises is its availability and exploitability in India. Preliminary surveys have shown Assam-Arakan in the northeast, Cambay in the west and Gondwana formations in central India to hold potential for shale gas development. Its exploitation, however, throws up several technological, environmental, policy and regulatory challenges.
The technology known as hydraulic fracturing or fracking was mostly developed by smaller independent oil companies, rather than oil majors, who had not paid attention to shale. Hence, the scramble to take over the independents with technology and acreage, or enter into agreements with them or farm in to their fields. But before we deploy the technology, India has to do more extensive and intensive exploratory surveys, for delineating such producing areas. Mere estimates of in-place reserve do not justify optimism. It is necessary to establish proven and recoverable reserves. The old adage that you have to drill a well to find oil or gas is still valid. Commercially viable production requires thousands of wells to be drilled, as the US has shown. But our drilling intensity, even in conventional oil/gas, is so poor that a large number of fields have been abandoned for poor prospectivity. We cannot afford to repeat this mistake if we want to exploit our shale potential optimally.
The more challenging will be environmental issues. Each well requires enormous quantities of water, estimated to consume anywhere between two to five million gallons, only half of which can be recovered for re-use. Vast amounts of chemicals also get pumped in, which contaminate ground water. Though technologies are available to treat sea water for use, it will be of little use in non-coastal areas, requiring transportation over long distances. Fresh water for human use is already short in India and this will be further aggravated if large-scale development of shale gas takes place.
Another environmental issue would be the possible damage to human habitation in and around these areas of development. Fracking involves the use of high power blasts of the order of 50,000 HP for cracking and loosening underground formations. These blasts could damage buildings in and around the site, especially given the population density in India. This will be in addition to the problem of acquisition of vast tracts of land for its operations. Both land and water are scarce in this over-populated country. A delicate balance, therefore, has to be achieved between shale gas production for energy security on one side and the environment on the other.
Even assuming we overcome these issues, there remains the policy and regulatory concerns to be tackled. The experience so far in oil and gas is hardly encouraging. Policy somersaults have bewildered foreign investors, mostly tilted to suit the ruling government?s favourite corporates and shutting out foreign competition. No stable fiscal or pricing policy has been followed, even after promising fiscal stability and marketing freedom in the production sharing contracts (PSC). If such a policy captured by domestic vested interests continues, there is very little hope of overseas capital and technology coming in. For example, of all the oil/gas blocks auctioned so far, 70% have ended up with national oil companies, amounting to re-nationalisation of oil/gas fields through the bidding route. So much for attracting foreign investment. India seems to be repeating the mistake for shale gas areas also. Prospectors are asked to wait till a new shale gas policy is formulated. All over the world, drilling for shale has commenced under their existing mineral development policies. Some producing fields in India, where shale formations have been struck, are made to wait for the yet-to-be-evolved new policy, thus holding up further development of an existing field covered by a valid PSC. It is really not clear why gas from shale beds needs a policy different from the one for natural gas. A molecule of methane from shale rock is no different from methane from any other source rock. Such tardiness and ill-preparedness on the part of government does not augur well for shale gas in India. What is required is an overarching mineral exploitation and development policy, and a regulatory regime that is perceived to be independent. Only then can India expect to have a vibrant oil and gas development.
The author is chairman of the Energy Think Tank and former secretary, ministry of petroleum & natural gas