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Shale: A ‘White Elephant’ for India
Despite the associated challenges that come with development of shale gas assets, world over, economies have chalked out the roadmaps and trying to translate the US success story. India, with its increasing energy demand-supply gap is now compelled to address the issues and accelerate the development of existing hydrocarbon resources with special attention to this very up-and-coming energy source - shale gas. However, as Debashish Mishra, Senior Director, Deloitte India, believes, "It will certainly take more than what can just be seen to replicate the US shale success story in India." In an exclusive interview with Mittravinda Ranjan and Rakesh Roy, he further shares his views on why at present shale gas is a distant dream for India.

Successful monetisation of shale gas assets in the USA, which accounts for almost 20 per cent of the country's total gas production, is one of the most discussed subjects in the oil & gas industry forums world over. Recent Deloitte report Oil and Gas Reality Check 2013 explains various stages of development of shale gas assets as – dormant, where the development is confined to feasibility studies with very little or no-activity such as Poland; nascent, where the Government aims at reducing dependence on gas imports and offers subsidies to encourage development as in case of China; incubator, where commercial production has already started and new basins are being tested for development like in Argentina, which is also witnessing an increase in new entrants and M&A activities in the country. The fourth stage - decoupler, where the new supplies are linked to the demand centers and where there is a fierce competition to maintain profit margins that countries like Argentina and the USA are likely to witness in the future. And, the last stage is - globaliser, where countries have the ability to produce shale gas at highly competitive price and companies seek higher price realisation in global markets as in case of the USA.

A Far-fetched Dream
Although India has been discussing shale for a long time and has even announced the shale gas policy, developing the assets is still a far-fetched dream. Mishra expresses “We are not even at the dormant stage since there are not detailed studies that can prove presence of enough shale gas formations in the Indian geology.” In the absence of such extensive information, it will be very difficult to even assess the true available potential in the country, he notes. Moreover, given the high population density and associated environmental threats such as ground water contamination etc., it may be difficult for India to pursue the plans in this direction, he adds.

An Expensive Affair
Mishra notes, "Though the technologies are available, these are prohibitively expensive outside USA. Drilling one well costs nearly USD 15-20 million (approx. Rs. 120 crore) which is very steep. Moreover, most of the countries lack availability of indigenous technologies that further makes it difficult to produce the gas." He explains that unlike other countries, USA always has technical expertise as well infrastructure for hydrocarbon sector that has enabled the companies to venture into development of shale gas assets in the country. Additionally, the business model in USA allows the investors to operate to have complete freedom of allocation and pricing the output thus enabling them to take informed investment decision, he says. Citing the example of Poland, where ExxonMobil was working on developing shale gas assets, the company quit as soon as it realised that it was not viable to produce due to prohibitive costs and that the earlier potential the company was incurring. “It would be no different in case of India as we do not have indigenous technologies and will have to acquire the required expertise,” he expresses. He stresses on the need of exploring the existing sedimentary basins which could have significant potential and advocates framing congenial regulatory and policy to attract investments to address the concurrent issues.

"Traditionally, India has a complex regulatory and policy framework in addition to the hydrocarbon exploring policy, which has elicited debates on production sharing and royalty issues etc," he notes. The government has been debating on replacing PSCs with Revenue Sharing Contracts (RSC) during the 10th round of NELP, but the final decision is yet to be taken. "India needs a robust policy framework to attract investments for sustaining long term growth of country's hydrocarbon sector," Mishra observes.

He considers financing of oil and gas projects as another major hurdle that the E&P players have continued facing even after this sector was opened to the private players. Comparing the capital markets in the USA and India, he states that USA has highly evolved capital market that allows a lot of flexibility for the investors to enter an investment at every stage of the development -this does not exist in India at present.

Adverse impact on the environment has completely taken wind out of shale gas in Europe and even many countries are discouraging development of shale gas assets despite the presence of technically proven reserves. The current process of Fracking is highly water intensive and also involves use of chemicals to extract gas from the rocks, which lie much beneath the aquifers that supply drinking water thus creating possibilities of affecting the water quantity and quality of ground water.

Within India on-shore exploration has been very challenging because of high population density. In USA, most of the shale gas reserves are present in regions that are scantily populated. But even USA has been receiving a lot of flak from the locals because of ground water contamination.

The Real Challenges
In addition to technology, policy, financing and environmental challenges, over-ground challenges such as lack of clarity in defining the ownership rights for common acreages bearing conventional and non-conventional energy resources could pose substantial risk to the operators, Mishra states.

Appreciating Veerappa Moily, the Honorable Minister for Petroleum & Natural Gas, Government of India, for raising the issue of harmonisation of ownership rights for the existing developers involved exploring in same acreage, Mishra explains that being high risk business, investors always seek clarity on the ownership rights before foraying into any new investments and this surely is a positive move.

"Like the rest of the global energy sector, the Indian oil & gas sector too is government dominated with maximum acreages being held by the National Oil Companies (NOCs) and though Government opened this to the private companies through National Exploration Licensing Policy (NELP). Still Government's constant intervention in controlling the price and allocation of output further discourages the private players from NELPs. Cairn has been a big success story with more than 40 discoveries - 26 alone in Rajasthan. If India had today 5-6 companies or success stories like Cairn, the country wouldn't have to depend on oil imports to the tune of 79 per cent, he rues.

He advocates that the encouragement be given to the private sector participation like China, which has almost doubled its gas production in short span of almost six years and is also pursuing shale gas asset development plans aggressively by creation of congenial environment to attract investments.

Time and again, he stresses on India’s need of having robust policy framework to provide level playing field to the E&P companies to operate profitably. Presently, there is a lot of negative sentiment prevailing amongst investors due to intervention of Government in output pricing and allocation. He notes that investors in many countries are facing this issue wherever the government tries controlling the price, but he is confident that bringing in transparent mechanism in gas pricing will surely gravitate the interest of major players in the Indian hydrocarbon space.

Taking the Pick
Mishra informs, "In the conventional space, world is actually entering into a golden age of gas and there has been a surge in the availability of natural gas world over and many countries may put the development of shale gas on the back burner for some time.” He says that the newly discovered gas fields in Israel have revealed some mind boggling numbers and these reserves are estimated to last for over 280 years and the last few years have seen Africa become a home ground for giants of oil & gas industry in countries like Mozambique, Tanzania and Nigeria which have promising conventional gas reserves offering credible alternative as environment friendly and possibly cheaper fossil fuel.

Mishra enunciates "Owing to the huge gas finds in the region, Mozambique Tanzania and Nigeria will see huge investments in the years to come. Africa will be the battle ground for the next two decades between for energy hungry countries like India and China to secure energy supplies." He further notes that it will take 4-5 years to develop a reasonably robust LNG infrastructure throughout the world, which will make gas a global commodity and result in decoupling of gas from the oil price indexing. In the next few years, Mishra expects that disparity of gas price across globe is not going to last forever.