India opens shale oil and gas for production

By Rakteem Katakey
Bloomberg News

India will allow explorers including Oil & Natural Gas Corp. and Reliance Industries Ltd. to produce shale oil and gas for the first time as Asia’s second-biggest energy consumer seeks to cut reliance on imports.

Under a new policy aimed at boosting domestic output of fossil fuels, companies will be allowed to extract oil and gas from shale rocks in more than 250 blocks the government has already given out, said Vivek Rae, the top bureaucrat in the oil ministry. The new rules will allow ONGC, the nation’s biggest, to start shale output almost immediately and in “substantial quantity” in about three years, Chairman Sudhir Vasudeva said.

India, which currently doesn’t allow exploitation of shale rocks, is trying to emulate the U.S., where a boom has reinvigorated industry and is leading the world’s largest economy toward energy independence. The technology that requires drillers to smash rocks forcing millions of gallons of water and chemicals through cracks may help Prime Minister Manmohan Singh meet his goal of slashing the energy import bill by 50 percent in seven years and to zero by 2030, even as global regulators assess pollution risks from hydraulic fracturing, or fracking.

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“We want to get the process started, to enable companies to at least start producing from fields where they’re already drilling for conventional oil and gas,” Oil Secretary Rae said in an interview. “This is the first phase, and we’ll later open up more areas.”

Cabinet Approval

The oil ministry plans to take the new shale gas policy to Singh’s cabinet for approval in about a week, he said. The government will later auction blocks specifically for shale oil and gas production, he said, without elaborating.

Singh’s administration is seeking to revive domestic energy production as import costs surged to a record $140 billion in the year ended March 31, 2012, or about 8 percent of gross domestic product. Securing fuel supplies is key to restoring the pace of economic growth to a targeted 10 percent, from an estimated 5 percent this year, the slowest in a decade.

India may still be at least three years away from large scale commercial production from shale rocks as explorers study data in their fields, while output from these formations is cutting imports in the U.S. and companies including Royal Dutch Shell Plc and France’s Total SA explore the fuel in China.

Clarity Needed

“A lot of clarity is required on gas pricing and fiscal incentives in the new policy,” said Mayur Patel, a Chennai- based analyst with Spark Capital Advisors, who has a buy rating on ONGC. “While production from shale in the extant producing blocks will be relatively quicker, land acquisition and water supply issues would hinder development of new blocks.”

Shares of ONGC have risen 16 percent this year to 311.40 rupees in Mumbai, compared with a 3 percent decline in the benchmark S&P BSE Sensex.

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France has banned fracking on concern the process contaminates underground water supply, while Germany proposes to outlaw the procedure in protected areas of the country. In the U.S., a surge in gas production from shale rocks from Texas to West Virginia made it the world’s biggest producer of the fuel in 2009, beating Russia.

The American Chemistry Council estimates low-cost natural gas may generate $72 billion in capital investment as petrochemical companies relocate or boost spending in the U.S.

Additional Wells

ONGC, which holds the most oil and gas acreages in India, will have to drill additional wells and build more pipelines to transport the gas, Vasudeva said. Shale oil and gas may be present in 10 basins in India, he said.

India holds 6.1 trillion cubic feet of technically recoverable shale gas reserves in three basins, the U.S. Geological Survey estimated in a report in January last year. That was less than 10 percent of the 63 trillion cubic feet estimate made the previous year, by the U.S. Energy Information Administration in a report.

“The USGS study was limited to three basins in India and the real potential is probably higher than that,” Vasudeva said. “We are in the process of examining and validating them.”

ONGC found shale gas at a well in India’s West Bengal state, according to a Jan. 27, 2011, statement. The company signed an agreement with ConocoPhillips in March last year for developing shale resources in India and North America.

Record Deficit

Higher oil imports are a reason India’s current-account deficit rose to an unprecedented $32.6 billion in the three months to Dec. 31, or 6.7 percent of gross domestic product.

“We need to do all we can to reduce this import bill and help boost the economy,” Oil Minister Veerappa Moily told reporters in New Delhi March 24. “Increasing exploration to find more oil and gas is the starting place.”

China has 25.08 trillion cubic meters (886 trillion cubic feet) of exploitable onshore shale-gas reserves, according to the country’s land ministry. The world’s biggest energy consumer aims to produce 6.5 billion cubic meters of shale gas by 2015 and set a target of 60 billion to 100 billion cubic meters by 2020, according to the National Development and Reform Commission.

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Higher shale gas production will be a boost for Reliance Industries which has been struggling to reverse an almost three- year decline in output from the nation’s biggest field. ONGC is seeking to raise output from more than four-decade old fields in India and help increase the country’s output which has dropped every month since November 2010 compared with a year earlier, according to oil ministry data.

Buying Stakes

Shares of Reliance, controlled by billionaire Mukesh Ambani, have dropped 7.9 percent this year. Spokesman Tushar Pania didn’t reply to an e-mail seeking comments on the company’s plans to produce from shale rocks in India.

Reliance bought stakes in shale fields in the U.S. from three companies including Pioneer Natural Resources Co. and Carrizo Oil & Gas Inc in 2010. Oil India Ltd., the nation’s second-biggest state-owned explorer and Indian Oil Corp., the largest refiner, together agreed to buy a stake in their first shale asset overseas in October last year and GAIL India Ltd., the nation’s No. 1 gas transporter, agreed to invest in Carrizo’s fields in September 2011.

“These companies would’ve learnt about technologies from their experience in the U.S.,” said Neelabh Sharma, a Mumbai- based analyst with BOB Capital Markets Ltd., a unit of state-run Bank of Baroda. “The companies would know what best shale formation to drill into. If the policy allows foreign investment, they could even bring their partners to India.”