DOWN THE YEARS, THE SLEEPY little town of Ichapur in West Bengal has been known for its two ordnance factories, Rifle Factory Ishapore and the Metal and Steel Factory. The two facilities have long been providing artillery—metallic parts, rifles, guns, and the like—to the Army as well as civilians. The origins of the one-time flourishing firearms base (a gunpowder factory to start with) can be traced to the early days of the British Raj.
In January last year, the town suddenly became prominent again when ONGC struck shale gas at a depth of 1,700 metres in its RNSG-1 well in the Damodar Valley Basin, part of the Indo-Gangetic basin. That made India the first Asian country to discover shale gas. Oil and gas majors such as ONGC, GAIL (India), and Cairn India believe when shale gas blocks here are opened for international bids next year, global majors will queue up. So far, the government has identified six basins for exploration—Cambay, Assam-Arakan, Gondwana, Krishna-Godavari onshore, Cauvery onshore, and Indo-Gangetic.
For India, a perennially energy-deficient nation (it imports about 80% of crude and 25% of its natural gas requirements), large deposits of shale gas will provide stability and energy security in a world where oil and gas prices fluctuate with every piece of breaking news. Think of it as a game changer for India’s energy economy.
According to the U.S. Energy Information Administration, India has recoverable shale gas of 252 million metric standard cubic metres per day (mmscmd). It also states that the highest reserves is in China (5,100 mmscmd), though no discoveries have been reported as yet. (See graphic).
Shale gas, an unconventional source of natural gas, is found within pores and natural fractures of shale, a sedimentary rock, hundreds of feet beneath the surface. Although its existence has been known for decades—the first natural gas well in the U.S. in 1821 had shale—it was not until the ’80s, when technology made large-scale extraction possible, that it became a commercial reality. Shale gas is extracted by a complex process of hydraulic fracturing, or fracking, developed by Mitchell Energy and Development Corporation in the U.S., which involves injecting a mixture of water, sand, and chemicals at high pressure to break the rock and release the trapped gas. The gas is collected through horizontal drilling.
Shale gas has transformed the U.S. from a net importer of gas to an exporter. Having relied previously on imports from Canada and Algeria, it marks the beginning of an era of self-reliance and cheap energy. It has also had a causal effect on natural gas prices there, which have tumbled to around $2 (Rs 111.82) per million metric British thermal unit (MMBtu) from $13 per MMBtu in mid-2008. The cost of production for shale gas has dipped from $8 per MMBtu to $12 per MMBtu in the ’80s to nearly $2 per MMBtu today. That’s equal to gas from conventional sources—‘free gas’ trapped in naturally-occurring rock formations such as carbonates, sandstones, and siltstones—which makes for competitive pricing.
To be one-up on its global competitors for technical know-how and expertise in operating shale gas blocks, India Inc. has already latched on to the U.S. opportunity. Reliance Industries (RIL) has acquired 40% in Atlas Energy’s Marcellus shale acreage in southwestern Pennsylvania. As part of joint ventures with Pioneer Natural Resources of the U.S., it has bought two more stakes: 45% in Eagle Ford shale acreage and 60% in Marcellus shale acreage in central and northeast Pennsylvania. GAIL has bought 20% in Houston-based Carrizo Oil & Gas’s Eagle Ford shale acreage.
Shebonti Ray Dadwal, a research fellow studying energy sources at the Delhi-based Institute for Defence Studies and Analyses (IDSA), a government think tank, says shale is India’s best bet in the unconventional gas portfolio. “It is available in far greater quantities than most other unconventional sources like tight gas [natural gas reservoirs locked in extraordinarily impermeable, hard rocks such as sandstone or limestone], and is also spread across the country, unlike coal-bed methane [an unconventional source], which is concentrated mostly in the east. There is also a tested technology for extracting shale gas, in contrast to another unconventional source: methane hydrates,” she says. The extraction from hydrates is challenging because the gas is in a solid form and the hydrates are widely dispersed in hostile Arctic and deep marine environments.
Bill Holland, associate editor, and Samantha Santa Maria, managing editor, of Platts, a leading provider of energy, petrochemicals and metal information, say that in the next five years, India, like the U.S., may well change from an importer of natural gas to an exporter. “It will have to reverse-engineer its LNG terminals from gasification to liquefaction plants, which will lead to selling gas to Japan and South Korea at prices two to three times the Indian government’s administered prices,” they wrote in an article titled Will India Emerge as an Energy Powerhouse Via Shale Gas? in February last year. (Natural gas—from both conventional and unconventional sources—is transported as liquefied natural gas (LNG) on ships if pipelines are not available. It is first liquefied at the port of departure and re-gasified at its destination.)
The presence of such large quantities of shale gas in the world will also change global crude oil dynamics. It will bring down crude prices because of the changed demand-supply situation. “Crude will be used more to produce complex petrochemicals rather than for mass rapid transport,” says Kalpana Jain, senior director at consultancy Deloitte India.
“But,” says Nitin Shukla, CEO of the Hazira Group of Companies, “land acquisition can become a major issue because exploring shale gas requires huge tracts of empty land for building a number of gas wells.”
Also, the large amount of water needed and the risk of contamination of groundwater and aquifers can derail a project. “How will companies manage so much water, especially in water-deficit regions?” asks Shukla. Add to that the complications in treating and recycling water.
However, Prashant Modi, president and COO, Great Eastern Energy Corporation (GEECL), the only Indian company involved in commercial production of coal-bed methane in West Bengal’s Asansol district, trashes the contamination argument. “That’s not true because the walls of the wells are constructed with protective casing and cement and are monitored every moment,” he says. Modi, whose company extracts 9.6 million cubic ft of gas per day, and sells to its 25 customers comprising mostly glass and fertiliser industries, clearly has an incentive to say so. (See Code Red).
AS IT STANDS, INDIA IS still a net importer of gas and the shale gas revolution will gather momentum with more discoveries such as Ichapur. But the abundance of shale in the U.S. means countries that exported natural gas there can redirect it elsewhere. Canada is planning to sell gas to China. Qatar, the world’s biggest gas producer, said in December last year that it would divert cargo to the emerging markets in Asia and South America. The West Asian country has promised to sell an additional 7 million tonnes of gas to China, and 4 million tonnes to 5 million tonnes to India. The latter already imports 7.5 million tonnes from Qatar.
But that too could change. Gas imported from the U.S. is not indexed to oil prices as opposed to costlier West Asian imports. So even after paying pipeline tariffs (around 60 cents per MMBtu), liquefaction, transportation, and shipping costs ($5 per MMBtu), gas imported from the U.S. works out to be far cheaper for India ($8 per MMBtu to $9 per MMBtu) than gas bought from Qatar (at $16 per MMBtu).
“Countries which import hydrocarbon-based fuels were at the mercy of a few producers. They will now have far more options with regard to suppliers, with the U.S. turning exporter,” adds IDSA’s Dadwal. India will no longer be dependent on the whims of a few West Asian countries, which often work as a cartel to raise prices, she adds.
So, gas from the U.S. can virtually transform the Indian economy by meeting the growing needs of gas-hungry industries—power, fertiliser, cooking gas, petrochemicals, refineries, transportation (compressed natural gas), and sponge iron. “At a time when coal is just not available (using imported coal as feedstock is uneconomical) and naphtha is being sold at $20 per MMBtu, shale gas will be a godsend. It can give these industries a fresh lease of life,” says Amitava Sengupta, former director (finance and commercial) at Petronet LNG.
The U.S. exports natural gas to countries that have signed free trade agreements (FTAs) with it. India isn’t one of them, but as part of a one-off deal, its leading pipeline company, GAIL, has signed an agreement with Houston-based Cheniere Energy Partners to import 3.5 million tonnes per annum (mtpa) of gas from its subsidiary Sabine Pass Liquefaction. The first cargo is expected by 2016-17. GAIL chairman B.C. Tripathi hopes that over time, the country can tap into all the seven existing U.S. export terminals.
There are a few issues though, which need to be sorted out before gas season can kick off in a big way. One, India currently has just two gasification (or re-gasification, as required for imports) terminals, both in Gujarat—state-run Petronet LNG’s in Dahej and Shell’s at Hazira—with a combined capacity of 13.5 mtpa.
But Petronet LNG is likely to hike capacity at its plants in Hazira and Kochi, Kerala. The government also expects GAIL-NTPC to revive the Dabhol plant in Maharashtra. However, the real kicker is expected in 2019-20, when the nation’s liquefaction capacity will touch nearly 242 mmscmd collectively through the setting up of terminals along the eastern and western coasts by RIL-BP, Swan Energy, Adani-Gujarat State Petroleum Corporation, and the Hiranandani Group (see graphic). To cope with the inflow, GAIL and the private players plan to add 15,000 kilometres of additional pipeline in the next eight years.
Two, the government recently signed individual memorandums of understanding with Turkmenistan, Afghanistan, and Pakistan to bring gas through pipelines from Turkmenistan, but experts aren’t gung ho about it. Experts such as Dadwal have not only raised concerns over the security of the 1,700 kilometre pipeline passing through troubled Afghanistan, and Baluchistan in Pakistan, but also about Turkmenistan’s commitment. Moreover, efforts to build an Iran-Pakistan-India pipeline have failed because of U.S. sanctions and doubts over the gas supply and the safety of the pipeline.
HERE'S HOW THE NEW energy architecture could help India. For one, the country’s oil and gas import bill, an astronomical Rs 4.56 lakh crore last year, will reduce considerably. It will also help address the domestic gas shortfall, which was 98.4 mmscmd in 2011-12 and is likely to jump to around 178.1 mmscmd by 2014-15, according to estimates by the Ministry of Petroleum and Natural Gas and Spanish consultant firm Mercados Analysis.
Therefore, any source, domestic or foreign, or any fuel, conventional or unconventional, is a heartwarmer. A back-of-the-envelope calculation shows that a country growing at 8% to 9% (India is currently below 7%) requires a 7.5% increase in overall energy production every year. Crude production has stagnated, growing at 2% every year—from 34.1 mtpa in 2007-08 to 37.6 mtpa in 2010-11, and is projected to touch 38.1 mtpa in 2011-12. That’s good news for India’s oil subsidy bill, which could potentially reduce from Rs 68,481 crore in 2011-12 to Rs 43,580 crore in 2012-13.
Gas is also used to produce urea. So the import of the fertiliser, which had grown by 40% between 2001 and 2010, will fall. Today, most gas-based power plants are working at an utilisation rate varying between 58% and 66% compared with 78% for thermal plants because of supply interruptions and slow ramp-up in domestic natural gas production. Greater availability of gas will make these power plants more efficient.
CODE RED
ON THE EVENING OF JUNE 30, 2010, a geyser of natural gas and sludge suddenly erupted from a well called Punxsutawney Hunting Club 36, in Clearfield County, Pennsylvania. The toxic mix of gas, salt water, mud, and chemicals went 75 ft into the air for 16 hours and some of this mess seeped into a stream northeast of Pittsburgh. The accident not only destroyed the long-held belief propounded by gas producers about the safety of shale gas exploration but also restarted the debate on the environmental impact of drilling gas vs. economic benefits. Though natural gas is cleaner than coal, shale gas extraction from sedimentary rocks always carries threats of damaging the fragile ecosystem. Fracking requires injection of massive amounts of water mixed with chemicals at high pressure. If that water somehow leaks out and contaminates the groundwater or the underground aquifers, it could have a serious impact on public health, especially for those dependent on groundwater for drinking.
Managing the toxic waste water had been another major issue of debate in the U.S. GEECL’s Modi argues that the chemicals used are benign, and aquifers are protected by steel and concrete. But many U.S. states such as New Jersey have announced a one-year moratorium on shale gas exploration from August 2011. Countries such as Poland and France have banned shale gas exploration. For a densely-populated country such as India where land and water are at a premium, gas producers will need to be even more careful about the dangers of contamination and accidents such as gas flareups. Air pollution from leaking methane (a potent greenhouse gas) is also a concern. The role of the Indian regulator and the ministry will be a key to the success of the shale gas revolution, when it does happen.
