India has started preparations to explore and exploit its shale gas reserves. This was expected after the US started large-scale production of shale gas. The recent US success in shale gas production has also encouraged others like China to explore their own basins for the non-conventional gas. Meanwhile, international oil companies have also rushed to invest in shale gas acreages, apparently in a bid to get a first-mover advantage in a business that has the potential to transform the world?s energy scenario.
It is not that shale gas reserves were not known earlier. The only thing was that cost economics of shale gas production was not competitive. But now that conventional energy sources are depleting fast, exploitation of shale gas reserves is fast becoming a commercially viable option. It is not surprising that oil companies are rushing to take a piece of the emerging shale gas business. The fine print of the growing interest in shale gas is that the world is running short of cheaper energy sources and now is the time to exploit costlier ones. Production cost of shale gas is higher compared to natural gas because of the complex technique required for its production.
World crude oil prices tumbled from the peak of $147 a barrel in July 2008 to $35 a barrel in December that year following the global financial crisis. But the prices recovered soon. International crude oil prices were in the range of $85 a barrel in May this year, even though the world economy was yet to recover from the recession. Global crude oil prices fell to the level of $68 a barrel after the onset of the Eurozone debt crisis. However, oil has recovered the lost ground since then. This shows the resilience of the oil market.
Before it started production of shale gas, the US used to be a big LNG importer. But domestic shale gas has helped the world?s largest energy consumer to significantly reduce its dependence on imported gas, sending international LNG prices crashing. Spot LNG prices had hit the level of $22 per mmbtu during the first half of 2008. But prices have since come down to $4-5 per mmbtu. The growing interest in shale gas also reflects a new thinking to exploit local energy resources to achieve faster economic growth. It takes a relatively long time to convert mineral ores into finished products. So ores can be imported. But converting crude oil into refined products like petrol and diesel is a much shorter process. This is the reason countries across the world are shifting attention to exploiting local energy resources. Renewed interest in shale gas is part of the same pattern.
India may finally find big shale gas reserves. However, evolving a cost-competitive economic model would be crucial to large-scale production of shale gas. Shale gas should compete with imported LNG rather than domestic conventional gas, given its high cost of production. US shale gas may have cooled world LNG prices for the now but once the global economy again gets back on the track, prices should harden.
India heavily depends on domestic coal to meet its primary energy consumption requirements. But now it is planning to shift its energy consumption pattern toward natural gas in a bid to reduce its carbon emissions as part of the commitment to fight global warming. The biggest obstacle to achieving the shift is the domestic demand-supply gap. India has been importing LNG to meet domestic gas shortfall, which is in the range of 25-30%. But India has secured only a small quantity of imported LNG under long-term contract. It has to meet the bulk of its LNG requirement from the spot market, which closely follows movement in the international crude oil market. This is the reason bulk users like power and fertiliser sectors have been rather hesitant about using LNG as fuel or feedstock. The government is paying a huge subsidy on cooking fuel LPG on the ground that it is a clean fuel. Shale gas is also a clean source of energy and can replace LPG in urban areas if city gas distribution network is expanded. However, growth of the sector remains hampered because of domestic gas shortage.
India will need to invest heavily in building infrastructure, like LNG import terminals, storage facilities and re-gasification plants, if it is to undertake large-scale import of LNG. Perhaps for this reason, India has not shown much urgency to go for long-term LNG supply contracts despite the precipitous fall in LNG prices.
If India succeeds in producing shale gas on a large scale, it would help its plan to move towards cleaner energy consumption in the long run, without having to invest much. It is good that ONGC has started research work on shale gas business through a pilot project. RIL is also trying to get a fix on shale gas business through its investment in US shale gas acreages.
?noor.md@expressindia.com