Shale gas A strategic imperative for India

October 2010 www.deloitte.com/in

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or fractures must be created in the rocks to provide suitable permeability. the grains fit together so tightly that there is little movement of water or gas through the rock. Due to geological circumstances. and shale gas. increasing the costs of the operations and hence the costs of fossil fuel itself. gas would not flow easily and therefore extraction was difficult. A large share of the focus in the past century was on exploring the highly permeable seams of sandstone and limestone. The past decade has seen the natural gas price peak. In India too. tight gas. Due to the low permeability. Difficult geographical locations seem to be the norm for the exploration companies. Shale gas A strategic imperative for India 3 . these layers were compressed into a fine-grained sedimentary rock. at least temporarily. renewing the interest in development of ‘unconventional’ gas resources. Water is mixed with sand to keep the cracks open and therefore increase the permeability of the formation. Vertical drilling could only capture a zone of 20-30 meters and therefore only a small amount of gas could be produced per well. The gas which is trapped in this rock formation is called shale gas. Things changed for the better in the 1990s. Unconventional gas resources.Introduction The world is facing two energy problems in the medium to long term. Shale deposits have limited depth but cover a large region. enabling the gas to flow. and has changed the US gas market scenario drastically. In many organic shale reservoirs. the drilling techniques evolved and horizontal drilling is possible today. Horizontal drilling enables the well to cover a shale zone for hundreds of meters. such as coal-bed methane. but its extraction was considered economically unviable because of the low permeability of shale. climate change and peak oil. the natural gas is stored as free gas in fractures. energy ‘demand vs supply’ gap has increased the focus on developing all possible energy sources. All rocks have pore space that can hold water or gases. Over the past couple of decades. With such a grim outlook for the future. In Shale. In terms of its chemical makeup. the depleting oilfields are on the rise. especially in commercial quantities. thereby increasing the gas produced per well. Gas was found in the shale all around the world for a long time. the shale must either have natural fractures. Shale is the common name for rock that was once layers of clay or mud. a tight shale deposit could be cracked open by injecting water into the formation at high pressure. A few have even started their exploration activities in the Arctic Ocean. In order to release the gas.When using a new extraction technology. shale gas can ease the demand pressure. shale gas is typically a dry gas primarily composed of methane. Major oil companies are going farther into the ocean to dig deeper in their quest for the fossil fuels. This advancement in technology has improved the economics of shale gas. including shale gas has the potential to contribute significantly for a few decades. Compared to the news about new discoveries.

90% of the global shale gas is currently produced by the USA. Marcellus. took the shale gas industry to new heights. Some of the factors that led to the success of shale gas in the USA can be attributed to favourable geology. deregulated natural gas price. & Haynesville are some of the shale basins in the USA. a well developed gas market. well developed pipeline infrastructure. but this technology was not economically attractive. Arkoma Woodford. US DOE. and persistent R&D supported by US Department of Energy to help improve recovery techniques.Learning from the USA Shale gas has existed in the US for quite some time now. easy leasing framework. Over the years. Antrim. factors such as. 2009) 4 . Figure 2 United States Shale gas basins (Source: Shale Gas Primer. • Advancements in the horizontal drilling technology • Advancements in the hydraulic fracturing technology • A surge in the natural gas prices in the past few years as a result of significant demand pressures Fort Worth Barnett. This shale gas revolution has turned USA from a gas importing country to a gas exporting country (to Japan). Other than the factors mentioned above. the technology has been developed. Fayetteville. The low natural gas prices were not encouraging the investors to pump in their money into a nascent industry. large resources play. and tax credits. a stable fiscal regime. USA has revolutionized the shale gas and is responsible for technological and economical advantages in the shale gas production today. Primarily three factors have come together in the recent past to make shale gas more attractive. where the shale gas industry has prospered.

The recent MoU with USA on shale gas is likely to help in reserve assessment of certain shale basins in India. Comparing the price between shale gas and natural gas and the promise shale gas holds in the future. India plans to open up the shale gas exploration acreages by the end of 2011. substantial potential for gas is expected from these basins. Largely being an oil importing country. a number of sedimentary basins (Gangetic plain. The price of gas produced from KG basin under NELP is set at $4. Higher Natural gas prices in the years following 2000 and advances in hydraulic fracturing and horizontal drilling have made shale gas profitable in the past decade. one would expect a flourishing shale gas industry in India. Technological collaboration will help in using sophisticated models to pick out most prolific places to start drilling.Exploring Shale Gas potential in India Though Shale gas has been on the global energy map since the 1950s. Recent volatility in the conventional fuel markets highlighted the importance of shale gas in a country’s energy portfolio and self-sufficiency. In theory. Assam-Arkana. Though all the shale deposits are not ideal for shale gas exploration. Rajasthan. and could return to the $150/barrel it saw during its peak in 2008. As a part of the plan to bridge the energy deficit. India’s energy security is pivotal in sustaining its economic growth in the next few decades. While the import prices paid to LNG imports which depend on international gas prices were as high as $16/mmBTu. Currently natural gas trades at around $4-6/mmBTu on NYMEX making shale gas an important asset to have in an energy company’s asset portfolio. but it hit its price peak in June 2008 when it was trading at $13/ mmBTu on NYMEX. & Damodar – have large shale deposits. Oil is currently around $70-75/barrel.2/mmBTu and the price of C-series gas at $5. Andhra Pradesh & other coastal areas) in India. India is ready to begin its foray into shale gas. Sedimentary basins of Indian Subcontinent Shale gas A strategic imperative for India 5 . including the hydrocarbon bearing ones – Cambay.25/ mmBTu. it has only been technologically and economically accessible since the 90s. Gujarat. Natural gas is currently at $4-6/mmBTu.

being the clean source of energy compared to coal or crude oil. Major Shale Gas Prospect Marcellus.” The companies worldwide are looking to invest in the shale gas business and are considering it as a lucrative business. the oil companies in India are allowed to produce only conventional oil and gas from their exploration blocks. Importance of diplomatic relationships Shale gas has been the game changer. and pave way to a cleaner and greener world. According to the current policy. India has not been very successful in attracting the global super majors in the oil & gas sector. The government and the industry should join hands to exploit the domestic reserves as it would be more economical compared to imports. The world is aware that maximum percentage of the global carbon footprint will be of the emerging nations. the countries mentioned before will help India leverage their technology and skills to develop the shale reserve in India. • Market driven gas pricing model • The government assistance to public and the private sector companies in importing the shale gas technology to India by providing incentives. have hit thick seams of coal and shale. Some of the regions with significant shale gas reserve : Country USA Australia Europe New Zealand China 6 To achieve the reliable supply of shale gas. Having technological advances & tested business models in the shale gas industry. It is therefore very important that the developed countries bring the necessary funding and technology into these emerging nations to rapidly grow the shale gas industry. companies cannot bank on experiential learning. New Albany. New Zealand and China will prove beneficial in the near future. This change might revive old wells which have been declared as commercially not viable and also increase the energy capacity of the country. It changed United States of America from a gas importing country to a gas exporting country in the past decade. but do not show interest in testing because they are not allowed to do so. Oil companies. • A policy that allows oil companies drilling for conventional oil and natural gas to investigate and produce shale gas & Coal bed methane along with natural gas. while drilling for oil. Barnett. The strategic tie up of the Indian companies with the foreign companies can be leveraged on the policy level to encourage and attract greater foreign and domestic investment in the Indian shale gas business. author to the Pulitzer Prize winning ‘The Prize’. A separate bidding round is required for the unconventional sources. Some of the imperative considerations are. Shale gas and Carbon Credits Natural gas. Silurian and Mikulov Whangai Shale Sichuan Shale . • A robust shale gas policy should be in place before awarding the blocks. has the potential to mitigate the environmental degradation. India’s shale gas reserve may be larger than the conventional gas deposit and has the potential of being the new and significant contributor to gas supply. Cooper and Georgina Alum. Speculative Seismic exploration should be done to identify high potential shale gas blocks. World eminent energy economist Daniel Yergin. Indian companies have already forayed into countries like USA and Australia. Historically. as these are considered unwarranted windfall. Europe.Policing the Policy India’s current gas demand is limited by its access to gas supplies based on domestic production and imports availability. The countries all over the globe are reducing their carbon footprint as mandated/ agree upon at the Copenhagen Summit. Amassing the technical Knowledge for a competitive advantage Acquiring overseas assets for exploring the shale gas reserve is important as it will help the Indian companies gaining the technical knowhow and the skills required to operate the business. Supply of natural gas in India lags behind demand and by 2015 the gas demand is expected to rise to 120 billion cubic meters (BCM) a year from 62 BCM per year in 2010. Domestic Vs Imported Shale gas According to the preliminary estimates. Focusing on the strategic tie-up with countries like Australia. Assuming that history may repeat itself. primarily China and India. Haynesville Shale Amadeus. has referred to shale gas development as “the biggest energy innovation of the decade. Natural gas can offset the CO2 emissions of the crude oil and coal.

Therefore it is in the best interests of all the domestic companies.Do we have regulations in place? Utilization & marketing of production. Regulatory framework Facilitative environment for availability of W/O rigs. Reliance Industries took the lead and paid few billion dollars for 40-60% stake in various shale gas sources in USA.which occurs over a period of time. period of the lease – to encourage maximum shale gas exploitation from a lease area Work-over Drilling and completion Facilitative environment for management of drilling costs and standards for well completion – framework in place? Production Hydraulic fracturing Technical. Profit Sharing vs. transportation and pricing – does existing regulation attractive enough for shale gas developers? Shale gas A strategic imperative for India 7 . JV • Dynamic vs. sourcing of water and disposal thereof . safety and environmental standards for hydro-Fracturing process including prevention of collateral damage to other geological resources. Bharat Petro Resources has also entered into an agreement with Australia’s Norwest energy to pick up a stake in two shale gas blocks from the Perth Basin. Shale Gas Development Cycle • Award of mining lease – Oilfields (Regulation & Development) Act & PNG Rules provide broad framework • Terms for award . who have an interest in the shale gas business. special treatment of work over expenses. Other companies are also looking to invest in acquiring knowledge and assets. to look at reserves abroad.needs to be developed • Selection of Fiscal regime – Royalty vs. Static fiscal regime – aligned to development needs • Whether current Permit regime is facilitative Mineral leasing and permits Abandonment / Reclamation requirements needs to be calibrated for restoration of surface area especially in populated regions – a balanced framework to make local populace a stakeholder in the operations Abandonment Road and pad construction India have regulatory regime in place with adequate Oil & Gas development experience – Do Shale gas developers need any more favourable regime to carry out operation in time.

A single classification may help lowering cost of production by providing economy of scale for the operations. income tax exemptions may be avoided given the long tenor 8 of the leases and competing demands for revenue. it may be prudent to run an economic viability model or incentives based approach before freezing commercial and fiscal framework. • Fiscal Regime: A progressive fiscal regime with tax credit for inputs and time linked royalty regime will entice the established players. • Criterion for selection of the developer: Shale gas geology is in its infancy in India and one cannot be sure if the shale gas economics are beneficial until a few wells are drilled. • De-regulation framework: Gas price freedom/ deregulation in the US has been mentioned as one of the turning point for Shale gas success. . There may be situations when both shale and conventional hydrocarbon resources lie in the same vertical zone. Guidelines to prevent the contamination of aquifers and limits on well pads and well density in populated areas will minimize the environmental impact. but the term of the lease should be adequate for completion of commercial exploitation without much slack. The definition should consider all the parameters that define a hydrocarbon due to shale gas condition. Though shale gas extraction seems more controllable than producing gas from a conventional hydrocarbon reservoir. • Availability of water and environmental issues: Shale gas operations would require large quantities of water for hydraulic fracturing process. Globally accepted parameters should be considered for defining the unconventional condition. and shale gas. Technical criterion could consider a technological alliance with an overseas entity or availability of technical experts or understanding of technical knowhow. But since the shale gas economics have not yet been tested in India. Unavailability of water sources for the awarded blocks could pose logistical issues and mean additional cost. The right size of the shale gas blocks will invite interest from established entities. Ideally. the definition should serve as a guide to clear any dispute that might arise. The terms of the lease should give adequate period for the complete exploration of the awarded blocks. In such situations. coal bed methane. All these unconventional resources require similar infrastructure for development.Key challenges Following are some of the key points that require deliberation before awarding the shale gas blocks: • Defining geological conditions: Care should be taken to define clearly what an unconventional condition is. Complete freedom to price and sell shale gas within India will be of key interest to established players. • Classification of all unconventional gas resources: Unconventional gas resources come in various forms such as tight gas. • Acreages size and terms of lease: A block below the threshold area may lead to slapdash approach in resource exploitation and prevent it from becoming a pure capital market play. The financial criteria may consider a strong balance sheet and sufficient cash reserves.

The industry and the government need to work together to come up with a shale gas exploration policy that not only encourages foreign investment but also encourages domestic economic growth. There are some kinks and considerations that need to be worked out before the shale gas takes off economically. Shale gas is definitely an opportunity. can bring about a change in the energy mix of the country.Conclusions Everyone following the new developments in the Shale gas industry knows about its importance in the future. if harnessed effectively. The effects of shale gas can be far reaching and therefore it needs to be given adequate importance. Shale gas A strategic imperative for India 9 .

He has over three years of experience in oilfield operations and consulting. With over 10 years of professional experience. 2010 “Exploit potential of shale gas: US to India and China” Economic Times. 2010 “Why not go for shale gas?” Reuters. He holds an integrated Dual degree (Bachelor’s and Master’s) in Mechanical Engineering from Indian Institute of Technology at Mumbai. 2010 “Shale gas and its challenges” Energy Information Administration www. 26th Aug. pilot project to start in 2011” 10 . 17th Jun. 20th Apr.iea. 2010 “India open for shale gas exploration” The Hindu.Contributors Neeraj Gupta He is a Senior Professional with the Energy & Resources practice of Deloitte. She is an MBA from SJM-School of Management.doe. she focuses on providing consulting services to clients in the Energy & Resources sector. Hima Bindu Yadlapalli She is a Manager in Deloitte’s Strategy & Operations team. 2010 “ONGC embarks on shale gas exploration” Deccan Herald. 9th Aug. 2010 “India-U. 2009 “ONGC eyes gas from Shale. References Economic Times. 2010 “Shale gas: A game changer India should turn to” Financial Express.S. Vikas Reddy He is an Assistant Manager with the Energy & Resources practice of Deloitte. He has over sixteen years of international experience with leading oil & gas companies. shale gas exploration initiatives set to advance” My Digital FC. 19th May.gov International Energy Agency www. 25th Aug. Warangal.eia. 30th Jun. 17th Oct.org Money Control. IIT Bombay and holds an Engineering degree from National Institute of Technology. 13th Jan. He holds an integrated Master’s degree from Indian Institute of Technology at Roorkee. 2010 “Gas still remains a pipe dream” Live Mint.

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