Limited reserves, pricing issues and debates over possible environmental damage may dampen the prospects of India's nascent shale gas industry, seen by many as a step toward energy independence of the 1.2-billion power-hungry nation.

The questions concerning shale gas in India may be subdivided into three groups – one regarding the feasibility of drilling in terms of estimated gas availability; another regarding administrative issues promoting or deterring the shale industry, and third regarding the possible environmental consequences which - once a reality - may be impossible to undo.

According to the most recent estimates from 2013, India's reserves of shale gas - natural gas trapped in fine-grain sedimentary rocks called shale formations - are likely to cover about 26 years of natural gas demand. This may suggest that reserves are limited but, at some 96 trillion cubic feet (tcf), they seem considerably larger than the proven reserves of some 3.0 tcf recoverable from India's KG-D6 gas field, believed to be the country's largest gas deposit.

On the other hand, given that shale gas reserves are not expected to last even half a century, they can hardly be relied upon to sustainably feed the nation's insatiable demand for energy.

In an effort to ensure fair distribution of resources India has not yet opened shale gas exploitation to private companies. They, in turn, are not eager to participate in that sector due to the current gas prices, which have been recently updated but are nevertheless still not completely market driven.

On top of that, falling global oil prices, some 20% down in November compared to mid-2014 levels, may at some point make costly shale exploration unviable, thus jeopardising operations in the United States, the global shale leader, as well as India's investments there.

While shale gas may offer India a helpful push towards higher energy accessibility and independence, it may also put the country under significant water and environmental stress, which would offset any potential energy benefit.

Shale exploration, where commercial success has hardly been achieved outside North America, should not overshadow the need to develop other sources of energy supply, such as renewables, or reform India's complicated coal supply system, which has been increasingly failing to transform the country's abundant coal reserves into an actual seamless supply of energy.

WHY SHALE MATTERS

India imports 80% of its crude oil and 18% of its natural gas needs. The country was the third-largest energy consumer in the world in 2013, following China and the United States. It ranked as the fifth-largest energy producer and fourth-largest energy importer in the same year, Enerdata figures showed.

India's energy imports total some USD 145 billion a year and are expected to reach USD 300 billion by 2030. Natural gas demand is seen to grow at an average of 6.8% a year from FY 2013 to FY 2030, India's petroleum ministry said in a report published in 2014.

If the country finds a way to produce more gas on its own, it could reduce its dependence on domestic coal and rising coal exports, and may also cut its petrol and LPG consumption through the use of compressed (CNG) and piped natural gas (PNG).

FALLING OIL PRICES

Many Indian oil companies such as the Oil and Natural Gas Corporation (ONGC), Reliance Industries (RIL), GAIL, Oil India (OIL) and Indian Oil Corp. (IOCL) have bought stakes in U.S. shale assets, considering them not only as profitable business opportunities but also as a way to gain exposure to the exploration technology applied.

Oil prices were above USD 100 per barrel when the deals were signed but have dropped by some 20% to slightly more than USD 80 as of November 2014.

Global unconventional crude output was 20% of the total in 2013 and is seen at 33% by 2035, EIA figures showed. According to various estimates, an oil price below USD 80 per barrel would make a third of the U.S. shale output uneconomical.

Oversupply and sluggish demand by major consumers such as China and the EU are expected to keep prices subdued in the near-term but the situation is dynamic and it would be difficult to speculate on the extent to which the present slump will affect long-term returns on shale projects.

However, the less revenue Indian oil extracting companies collect, the less they would be willing to invest in costly new operations. The diesel price deregulation that was announced in mid-October 2014 might come in handy in this respect as it is expected to significantly reduce the subsidy payouts ONGC, GAIL and OIL transfer to state refiners to partially compensate them for the losses they make while selling fuels at regulated prices.

POLICY & PRICING

In September 2013, the Indian government approved a shale gas exploration policy that allows two state-run national oil companies (NOCs) - ONGC and OIL - to drill for shale gas within their respective conventional fuel exploration blocks.

The policy has provided the NOCs with a number of financial incentives including income tax and customs exemptions, while keeping royalties and taxes the same as for conventional extraction in a particular area.

Carrying out shale gas/oil exploration by private and joint venture companies is envisaged under a proposed but still unadopted Uniform Licensing Policy (ULP).
Apart from the ULP adoption, one thing that will eventually determine the willingness of private companies to drill for shale, is the return they may reasonably expect to make on their investment, which essentially boils down to clarity in gas pricing.

On October 18, 2014 the country moved a step closer to market-driven fuel pricing by lifting diesel price controls and raising the cost of natural gas by some 30%. The new price of locally-produced gas came into effect on November 1, 2014.

The government hopes the higher gas price, to be revised every six months, will boost competition by encouraging private companies to drill for shale.
However, the updated gas price remains some 30% lower than the one agreed upon by experts of the previous government, and is still not completely market-driven, which private companies may consider as a deterrent to their possible investments in oil and gas operations in India.

In addition, the petroleum ministry has been debating the unified licensing regime to include a clause for production sharing, under which private companies would be required to share a percentage of their revenue starting with the launch of operations. If gas prices are regulated by the government and not market-driven, this would not be a proposition private companies would be willing to accept.

In November 2013, India began shale gas exploitation with ONGC and OIL launching drilling operations at Jambusar near Vadodara in Gujarat. In 2012, ONGC struck shale gas in a pilot project at Ichhapur in Burdwan district of West Bengal.

In late 2013, ONGC announced plans to invest about INR 6.0 billion in shale gas exploration in the next two years.

In 2013, the U.S. Energy Information Administration increased its estimate for India from the 63 tcf (1.78 tcm) of technically recoverable shale gas it had posted in 2011, to 96 tcf (2.72 tcm), representing 1.23% of the global resources. The EIA identified four major shale basins - the Cambay, Krishna-Godavari, Cauvery and Damodar Valley.

CONCERNS

The hydraulic fracturing technology used in shale gas extraction is feared to be a powerful pollutant, capable of devastating India's water resources, thus offsetting any social benefit from increased energy production.

Currently existing water supply constraints mean that not all possible shale gas deposits can be explored, limiting the potential benefit the extraction of the fuel has to offer.
Globally, it has not been definitively ascertained whether it is possible to cost-effectively recycle the wastewater used in shale gas extraction. Given that wastewater treatment has been a problem in India since many years, it may be unrealistic to expect that wastewater from shale gas exploitation would be adequately disposed of.

Another issue of concern, which is bound to cause delays in shale gas exploration projects, is that Indians, unlike Americans, do not hold mineral rights in their properties. Consequently, shale exploration companies or state authorities will have to buy the land needed for the projects, often from numerous land owners, in a lengthy and slow-moving process that will add to the already high costs of exploration.

Additional problems include the need to displace large masses of people as many likely shale gas deposits are located in populated areas, and fears that the extensive horizontal drilling may lead to earthquakes, landslides and other high-impact disasters.

Developing India's domestic supply capacity and securing its energy needs over the next decade is one of the toughest challenges recently-elected Prime Minister Narendra Modi is facing.

To achieve this, India will have to search for new resources, new technology and new investment opportunities both at home and around the globe.
Shale gas is certainly an opportunity but India has to carefully look at its advantages and downsides before it takes a leap.