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Lessons from US shale revolution

Shale revolution in the US has delivered spectacular results through efficient policy management and enticing investment opportunities. What is blocking India from hitting the same bull’s-eye?

As predicted by geologist M L King Hubbert, the US oil production peaked at 11.3 million barrels per day (MMBD) in 1970, reaching a low of 6.8 MMBD in 2008, only to jump back again to 12.8 MMBD now, thanks to the shale revolution. Achieving energy independence in the US is no more a concern. The drop in international oil prices since 2014 is hurting the economies of OPEC. US natural gas production had a similar tale, with sharp declines in the 1970s due to gas price controls. New gas power plants were banned to ensure gas supplies for essential needs like residential heating. When the gas prices got deregulated in 1978, its production increased and prices came down. When gas production began to stabilise in the late 1990s, the US started to invest in large LNG import terminals, expecting a gas deficit. Fortunately, gas production began to increase in the latter part of the 2000s, thanks to the shale revolution.

WHERE US SUCCEEDED AND INDIA FAILED

During the last 50 years, India’s oil and gas production is a startling contrast to the US. Our production increased by 500 MBD during 1980-1990 and has remained stagnant ever since. Currently, our oil dependence is 81 per cent and even higher for natural gas. After reaching a high of 60 billion cubic metres gas per day, production has fallen below 30 BCM. India’s energy dependence has steadily increased from 15 to 48 per cent as a result of its failure to exploit its oil and gas reserves.
One obvious question is why did India fail where the US succeeded? A wrong analogy given is that the US has enormous petroleum reserves while India is not this well-endowed. Around 78 per cent of India’s sedimentary basin hasn’t been explored for petroleum reserves. Till an extensive exploration is out, writing off India does not seem fair.
Regarding investment opportunities in the US, even an oil-rich country like Saudi Arabia has shown interest to explore for shale reserves in the US because of attractive terms offered by the US to explorers and its transparent regulations.

PERCEIVED CRONY CAPITALISM

Reliance and ONGC disagreed in the Krishna-Godavari basin regarding the possible production of oil by Reliance from the adjoining oil reserves belonging to the ONGC. In other countries, such problems are settled by technical people and not by courts. Justice A P Shah, who looked into the controversy, was fair in faulting ONGC and Reliance for not bringing the possibility of gas migration to the attention of the Director General of Hydrocarbons (DGH) soon after the discovery. However, the error was in the conclusion that gas in ONGC leases belonged to the nation.
When a Canadian company, Cairn, wanted to sell the company to Vedanta, the intervention of the petroleum ministry made a reasonably straightforward commercial transaction quite complicated that resulted in steep drop in the efficiency of production. ONGC had a 30 per cent holding in Cairn’s oil fields, but Cairn felt it unfair to be obliged to pay full on this share. There would have been no dispute had the government not agreed to such ambiguous terms while signing the Production Sharing Agreement (PSA).
The KG Basin D6 oil exploration by Reliance is the textbook case for crony capitalism and bureaucratic intervention. The government intervened, lest Ambani pull a fast one on them. Finally, the Supreme Court resolved the pricing issue. Oil companies in the US too have a more than a fair share of lobbying in Washington DC to influence the US Congress. What is different from India is that if an influential politician tweaks the law to favour a company, such corrupt practices will be exposed along with hefty penalties.
There were instances when the US Congress voted legislation which harmed the economy because of the role of vested interests. Ethanol subsidy and the corn lobby are cases in point. However, the Congress was able to quickly leap back on its feet and change rules detrimental to the economy. Soon after the first oil shock, Congress adopted a law to support small refineries by imposing oil price control. However, when it found that such price controls were counter-productive, it reversed it.
In India though, petrol price manipulations are for the advancement of political preservation in the guise of energy security. It took substantial time for India to liberalise oil price for producers by dismantling the Administered Pricing Mechanism. However, soon after, when oil prices went up, India ‘hurt’ ONGC and OIL India by forcing them to sell oil at below the market price and private companies like Reliance, Essar and Shell close down their service stations.

LESS BUREAUCRACY, MORE RULE OF LAW

In 2012, the administrated price for public sector oil companies was about $2/mmbtu; for new gas reserves it was around $4 to $5/mmbtu while India paid about $13/mmbtu for LNG imports. Expert committees had strongly urged the government to liberalise gas pricing, failing to realise that the government had no political will in this regard. This issue was compounded by a complicated pricing formula which had no relevance to the Indian market. The method that is implemented today is based on four benchmark prices of US Henry Hub, UK’s national balancing point, Canadian Albert and Russian gas markets. Instead of using such a complicated gas formula, the government had allowed the Indian market to discover the price. The reason given was that India does not have a well-developed gas supply infrastructure and gas producers will use their monopoly power to impose higher prices.
Unlike India, when exploration areas are leased in the US, there are no exclusive contracts for natural gas and shale gas. All over the world, production-sharing agreements (PSA) use the concept of profit-sharing to ensure that the state reaps the benefit of increasing profits. On the other hand, to address the suspicion of oil companies trying to minimise upstream profit or gold-plating the investment, the petroleum ministry changed PSA terms from profit-sharing to revenue-sharing. The fact that oil companies are more interested in earning profits and not producing more oil which may not be profitable, is a fundamental flaw in such an arrangement.

SMALL STONES, BIG RIPPLES

Contrary to expectations, the chief architect of shale revolution, George Mitchell, is a small time wildcatter. India should take a cue and encourage entrepreneurs like Mitchell to enter the petroleum sector. In a way, NDA’s strategy of developing ‘Discovered Small Fields’ is an encouraging first step on this note, as it has succeeded in creation of 15 new entrants. A little more foresight, combined with timely tactical manoeuvres could go a long way in aiding India to succeed where it has failed so far.

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