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Unjust enrichment or scam? Little effort to exploit rich reserves The dooms day of crude oil ‘Kaliyuga’ of climate change preventable Moily and his magic wand... India’s Gas Scenario Should petrol and diesel be brought under GST? Does India need a giant integrated PSU oil company? Open up the oil market Will OPEC succeed in increasing price? Why have we failed? OVL records highest ever profit The great oil subsidy riddle Old wine in old bottle
 
Little effort to exploit rich reserves
India is fighting with its back to the wall. Electricity price is soaring. Worse still, in several pockets there is load shedding, reminiscent of the Calcutta of the 1970s. Shale gas offers an alternative; India has huge reserves of shale gas estimated to last 50 years. But there’s no policy to tap

IN INDIA WHERE gas prices are determined more by competitive politics and not by market forces, investors have little incentive to look for shale gas. Based on current consumption, India has recoverable reserves of about 96 trillion cubic feet that will meet 50 years of gas needs. But India’s efforts on developing shale gas will be still born because we don’t have a sound shale gas exploration policy.

In May 2013, the US Energy Information Administration completed an update of shale gas and shale oil resources of the world. It has estimated for India in-place shale gas resources of 584 trillion cubic feet (tcf) versus technically recoverable resources of 96 tcf. The same study has estimated recoverable oil resources of 3.8 billion barrels versus in-place resource of 87 billion barrels.

The report has estimated for the world technically recoverable shale gas resources of 7795tcf (versus proven natural gas resources of 6614tcf) and shale oil resources of 335 billion barrels (versus proven oil reserves of 1668 billion barrels). The top five countries with shale gas reserves are US(1161tcf), China (1115tcf), Argentina (802tcf), Algeria (707tcf), and Canada (573tcf). These are very impressive reserves and will convince anyone why shale revolution has become a game changer.

The reserve estimates have changed for most countries since the last EIA study of 2011. For some countries estimates have increased and for others they have decreased. This was because of the additional information available from the geologic research and well drilling. For example reserves of China, Poland, France, etc have decreased while for most countries they have increased since data is available for more basins. Since there has been very little exploration activity to look for shale gas or oil in India, one cannot have much confidence in India’s reserve estimates. They are likely to be revised higher or lower in the future. However, one thing is sure that India has huge potential to tap shale gas provided we adapt proper exploration policy.

 

Illogical restrictions...

There is no difference between shale gas and natural gas excepting that shale gas requires far more complex technologies while natural gas is relatively easy to produce. The US has no separate legal framework to exploit shale gas and natural gas excepting the stringent environmental regulations in the case of the former. The same is true in other countries. For reasons difficult to comprehend, the current exploration agreements signed in India are prohibiting oil companies from developing shale gas even if they have succeeded in finding those reserves. I wonder why?

Investors who have to develop shale gas will look for better terms since cost of developing shale gas is considerably higher compared to natural gas. This is especially true if gas is not associated with oil. According to an EIA report, Joshi Technologies and ONGC have succeeded in finding shale gas in acreages awarded to them to explore for natural gas in 2010 and 2011 respectively. But they were prohibited from developing those reserves.


Policy not announced yet...

There is compelling impression that the government is not serious in promoting shale gas. For more than three years

government has been struggling to craft a shale gas exploration policy. In recent months it has been announcing regularly that a new policy will be unveiled soon. But when that day dawns to give birth to shale gas industry, the baby is likely to be still born. PNG Minister Moily’s wish for India to be energy - independent by 2030 will remain a pipe dream.

Six months back the Rangarajan Committee had recommended new terms for a production-sharing agreement. Recommendations concerning profit sharing have been incorporated in the proposed bidding terms for shale gas to make them more transparent, equitable and ‘attractive’ for investors. It is claimed that the new terms will minimise government intervention, incentive for gold - plating, and complications in accounting. On paper the new methodology on production-linked payments seems to achieve these very reasonable objectives.

Unfortunately the proposed methodology is extremely complex and cumbersome for investors to assess profitability. It still has ample opportunities for over-statement of expenses to reduce income taxes, under-selling of gas, etc.

 

Precious time lost…

Even after all these ‘improvements’, the new methodology designed for shale gas exploration is not radically different. In short, India lost precious time in starting exploration of shale gas looking for a perfect legal framework. Besides we ended up with a model, which is likely to be unworkable.

The underlying thinking of production-linked payments is that the higher the production the greater the profitability, which may not be true. While this sounds logical at first glance, investors are driven not by production but by profit. It is this misalignment between government and investor interests which will lead to genuinely interested oil companies shying away from India. This has been the reason for monumental failure of India’s earlier efforts to attract major oil companies with plenty of capital and superior technology to invest in oil/gas exploration and production.

What is not properly appreciated is that the earlier production-sharing agreement (PSA) was sound where officials in charge had negotiated the terms properly. They had incorporated  a limit to cost recovery in most such agreements. In that case, the government can get its profit share much earlier unlike what happened in the case of Reliance’s KG basin. To prevent gold-plating, 100 per cent cost recoveries need not be allowed. Also there could be a limit to cost recoveries so that when the production starts, the government will also get some part of the revenues. These are standard practices negotiated in countries like Ghana, Turkmenistan and Kazakhstan which have PSAs. All these countries are also new to negotiate PSAs. Why did our officials fail to protect the national interest this way?

In addition to unattractive and cumbersome bidding terms of the new model, the current controversy of gas pricing will even be a bigger hurdle in promoting shale gas exploration in India. None of the companies in India, in the private or public sector, has the required technical ability to undertake shale gas exploration. Some of them like Reliance/GAIL by having invested in US oil/gas companies, have access to required technology. But that is not enough.


Reliance spends on shale gas in US, not in India

Reliance, which has invested about $5.7 billion in the US shale exploration companies, has already announced that it is not keen to invest in India to explore for shale gas. The prevailing gas prices in the US are around $ 4 per million btu. In India the re

commended gas prices are $8.60 based on Rangarajan Committee report and around $6.70 according to the petroleum ministry. Still Reliance is not keen. Why?

There are several reasons. In the US, the gas market is completely liberalised and prices are determined by supply and demand. The infrastructure needed to develop shale gas is in place and is also accessible at competitive prices. Success in finding and developing shale gas is extremely high. One of the reasons gas prices have dropped to low levels is because of the high profitability of liquids that are associated with the production of shale gas.

In some parts of the US, liquid production is so high (the so called sweet spots), shale gas could be developed for less than $2.00 per million btu. In fact in the absence of liquid production, shale gas economics will be poorer and gas prices have to go up to as much as $ 5 to $6 per mmbtu even in the US. It is also possible that should there be a shortage in the US, gas prices can go up to more than $10 per mmbtu as happened in 2005 and 2008.

Based on the US experience of developing shale gas, cost of finding and developing shale gas in India could be more than $ 8.00 per million btu. This is because India has no infrastructure for fracking and horizontal drilling. For this, India has to depend on foreign oil companies and that too US - based oil companies. It is for this reason even countries like Russia, China and the UK have been inviting the US oil companies with attractive offers to look for shale gas.

If in India shale gas is associated with liquids as is the case in some basins in the US, then even at lower gas prices, shale gas exploitation is attractive. Since India is not endowed with ample reserves of oil like the US, chances are that shale gas is likely to be dry. Thus the required gas prices needed to give adequate returns are likely to be higher.

When the international oil companies have far more attractive places with better terms to look for gas, why would they come to India where there is considerable uncertainty on gas pricing? BP must be regretting its decision to have joined Reliance with a PSA on KG basin.

Even the lower recommended gas price by petroleum ministry is opposed by some of the opposition parties. Their protest is driven not by the market realties but by an opportunity to find fault with the UPA. They argue that such high prices will give windfall revenues to Reliance while power and fertiliser industries will be hurt. Unfortunately our public is often swayed by such emotional arguments. It is not easy to convince the public that investors will not be interested in risky shale gas ventures if they cannot get attractive returns.


GAIL offers gas even at $21!

Recently GAIL offered to sell LNG at $21 per mmbtu to fertiliser companies while the maximum price allowed by the government to get subsidy is $14 per mmbtu. When  Gujarat State petroleum Corporation offered to sell its gas, bids were received for $8.80. Still GAIL would not have quoted such a high price unless Indian market can pay such an eye popping price. It is not easy to assess the market clearing price in an administered price regime. It is also possible that if gas producers start demanding higher prices using their ‘monopoly’ power as is feared by Rangarajan committee, there may be no demand for such higher priced gas.

In the US, gas prices were controlled for a long time till 1978. As a result there used to be gas shortages. When the debate started on the need to liberalise gas market, there was a heated argument to impose windfall profit taxes on the oil companies. As expected when gas prices were liberalised, they did go up. However, it was for a short duration. Oil companies invested aggressively exploring for gas. As a result the gas supplies exceeded the demand and prices fell. It is this market dynamics which has kept the gas prices at low level in the US. Similar things have started to happen in the West European market.

In India there is a fear that since gas infrastructure is not adequate to move gas easily, and gas producers may extract monopoly prices, market may not be efficient in discovering the right price. How long will it take to develop adequate gas infrastructure and what will it take for such an investment? This is a typical example of chicken and egg. Unless gas prices are liberalised, it is not possible to know how market will react. But neither politicians nor bureaucrats have any confidence in India’s market despite witnessing airline industries, telecom and automobile industries have performed in India to the benefit of the consumer.


And India spends merrily on costly gas imports!

No politician seems to lose sleep over the fact that India is importing far costlier LNG paying over $14 to $17 per mmbtu. Earlier contracted LNG imports are relatively cheaper but still higher than $10 per mmbtu. Spot LNG costs are oil-indexed and considerably higher than $6.70 price recommended by the petroleum ministry. While we have a raging controversy over the domestic gas prices, the government is promoting increasing amount of LNG imports to meet demand. About 30 per cent of 18,000 MW gas based generation capacity, which has come on line has remained idle while another 10,000 MW of additional capacity may join them because of shortage of gas. Is this the time to play politics with national energy security?

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