India Shale Gas: Bring It on Home to Me

This year Indian firms and the government have switched their shale gas focus from abroad to home.  As one Indian firm sold some overseas assets, the government of India moved to make exploration and production of domestic shale gas and coalbed methane (CBM) more attractive.

North American Ventures

Over the last five years, Indian oil and gas companies, both private and state-owned, actively sought shares in North American shale gas plays.  The overseas investments served two purposes:  to gain experience with and access to cutting-edge shale gas exploration and development technology that they could use in India, and to line up potential LNG imports from the U.S. and Canada.

Mukesh Ambani’s Reliance Industries Ltd. (RIL) kicked off aggressive acquisition by Indian firms of U.S. shale gas assets in 2010.  In April of that year, RIL purchased a 40% stake in Atlas Energy’s Marcellus shale tracts in Pennsylvania, New York, etc. for $1.7 billion and followed in June with a $1.4 billion acquisition of 45% of Pioneer Natural Resources’ Eagle Ford, Texas, shale gas acreage.  In October, RIL spent nearly $400 million for a 60% share of Carrizo Oil & Gas’ Marcellus shale gas tracts.  A year later, state-owned Gas Authority of India Ltd. (GAIL) spent $95 million for a 20% share of Carrizo Oil & Gas’s Eagle Ford holdings.   State-owned upstream Oil India Ltd. combined with state-owned refiner India Oil Corp. in October 2012 for a 30% share of Houston-based Carrizo’s Niobrara shale gas in Colorado for $85 million.  Just a year ago, Indian Oil Co. took a 10% stake in British Columbia Montney shale assets owned by Malaysia’s Petronas.  In exchange, the Indian refiner gained guarantees of 1.2 million tons of liquefied natural gas for 20 years from Petronas’ B.C. LNG project.  The deal was valued at $1.1 billion.

In the face of sharply declining oil and gas prices over the past year, RIL and Pioneer Natural Resources last month announced the sale of Eagle Ford Midstream to Enterprise Products Partners for $2.15 billion.  The midstream operation comprises 10 gathering plants and about 460 miles of pipelines.  Since October 2014, Indian press reports have suggested that RIL, which has invested $3.9 billion in Eagle Ford exploration and infrastructure, seeks a buyer for its share of the project.  The continued fall in oil and gas prices since then, although recovered somewhat from lows earlier this year, have depressed the value of RIL’s asset.

Domestic Assets

India’s Cambay, Krishna-Godavari, Cauvery and Damodar Valley shale gas basins hold less than 100 trillion cubic feet of technically recoverable gas reserves according to a May 2013 study done for the U.S. Energy Information Administration.  By comparison, the same study ranked China first with 1115 tcf, the U.S. fourth with 665, and Brazil tenth with 245.  Still, that compares well with India’s 47 tcf of proved reserves of conventional natural gas, two-thirds of which are located offshore.

State-owned Oil and Natural Gas Commission (ONGC) began exploration of the Damodar Valley basin for shale gas several years ago, as it already had coalbed methane (CBM) operations there. ONGC and Gujarat State Petroleum Corp. both have drilled wells in the Cambay shale for oil and gas. ONGC also plans exploration of the Krishna-Godavari, Cauvery and Assam-Arakan basins and in 2012 signed an agreement with ConocoPhillips for joint exploration and development of shale gas in India and abroad.

Although there is adequate water for hydraulic fracturing in the Damodar basin, concerns about water constraints have delayed formation of national government policies for shale gas exploration and development.  In 2013, The Energy and Resources Institute (teri) of India, an international-renowned think tank, challenged the formation of government shale gas policy with a commentary “India: Water or Shale Gas?”

The impetus for greater shale oil and gas exploration in India remains strong.  Coal accounts for 45% of India’s primary energy supplies and 80% of electric power fuel inputs, with all of the attendant environmental degredation.  India relies on imports for one-quarter of its coal, 80% of its crude oil (partially offset by large oil product exports), and almost one-third of its natural gas.  If India’s domestic shale gas resources can be effectively tapped, this would provide significant environmental, economic and energy security benefits to the county.

Regulatory Changes

With these benefits in mind, in late June 2015, India’s Ministry of Petroleum and Natural Gas indicated that it was considering two changes to current policy to encourage shale gas and CBM exploration and development under the New Exploration Licensing Policy (NELP). 

The first change would permit companies to develop shale gas and CBM in oil and gas blocks for which they currently hold permits for oil or gas.  Current policy limits permits to either oil or gas.  A senior MPNG official observed that such expansion “…would come with a rider that all investment in the new exploration activity would be ring-fenced…” so that costs for shale gas exploration could not be combined with existing operations for cost recovery.  The present production sharing contract (PSC) terms allow companies to recover costs before paying the government a share of production revenue.

The second improvement would remove the current restrictions on blocks to either oil or gas, to allow exploration and production of any hydrocarbons found.  An official at state-owned Oil and Natural Gas Corp. noted that sometimes “…during exploration we find other natural resources than what we were actually looking for.  But the PSC doesn’t allow us to extract other resources.”

Further, over the last two years, India has moved toward more market-based pricing for natural gas, which would provide greater incentives for gas exploration and development.

On September 2, the Indian cabinet approved the auction of 69 marginal field currently owned by state companies ONGC and Oil India, shifting to a revenue sharing contract from the current profit sharing model.  A uniform license covering all hydrocarbons including shale gas, shale oil and CBM will apply to the auctioned fields.  The partially explored areas reportedly contain 89 million tons of oil and gas equivalent reserves and include onshore, shallow offshore and deep offshore tracts.

The extraordinary power of farmers and other land-holders to delay or eliminate industrial development in India remains a concern that was only heightened by Prime Minister Narendra Modi’s recent reversal on an executive order easing federal acquisition of land for infrastructure and industry and his decision to drop efforts to amend India’s tough land-acquisition law in Parliament.  Both steps appeared motivated by upcoming elections in the Bihar, an agrarian state, but could have fateful impacts on shale gas development.

ONGC efforts in the Cauvery Basin in Tamil Nadu State illustrate the tensions.  Farmers, environmental activists and political parties have demonstrated against ONGC’s development of shale gas reserves in Cauvery.  ONGC Director of Exploration A.K. Dwivedi was forced this month to explain that the company was not exploring for shale gas or CBM in the area, but only conducting research into the potential for shale gas.  ONCG still needs clearance from India’s federal Environment Ministry before doing any drilling in Cauvery, and even then would need state-level clearances.  Currently 31 wells in Tamil Nadu produce oil and some 110 million cubic feet per day of natural gas.

Conclusion

Lower gas prices in North America make Indian shale gas operations overseas less appealing, while shale gas developed in India will compete with much more expensive imported LNG.  Combined with a potentially more attractive regulatory regime, shale gas exploration and development in India could finally be reaching its launch.  The federal (Union) government in India will be key:  it needs to develop and execute national policies for exploration of shale oil and gas in India.  Further, as overseer of the state-owned hydrocarbons companies that dominate the Indian oil and gas sector, it must require more efficient and diligent efforts by ONGC, GAIL and others to define and develop national shale gas resources.

India Backtracks on Gas Price Rises

After India’s previous Congress Party-led government broke the decades-long tradition of holding natural gas prices way below market levels, the newly elected Modi government now is reviewing that courageous, if partial, step toward market pricing.  (For details on prior deal, see below "China, India Raise Gas Prices, Part 2--India," July 29, 2013.)

India has long set energy prices below market levels. This policy resulted in two predictable effects:  significant energy shortages and huge government deficits. Gas demand in India is expected to hit 450 million cubic metres per day by fiscal 2015-16 (starting next April 1), with domestic production of less than 120 mmcm/d and projected imports of 170 mmcm/d, leaving a gap of more than 160 mmcm/d (5.7 bcfd).   The International Energy Agency estimates that India’s subsidies just for oil products jumped from $11.5 billion in 2009 to $30.9 billion in 2011.  In the same period, subsidies for natural gas--a much smaller market--varied from $2 to $3 billion annually.

Despite the environmental and energy security advantages of natural gas in India, gas represents less than six percent of total primary energy requirements.  (Coal, mostly produced domestically, accounts for 45 percent.)  The Government of India provides its fertilizer and petrochemical industries not only subsidized prices for gas, but also priority allocations.  In 2007, these two industries consumed more than two-thirds of all gas used, but the growth of gas-fired power plants dropped that share to about half by 2012.

The rise of gas-fired power rested on hopes for Reliance Industries Ltd.’s (RIL) production from its giant offshore Krishna-Godavari D6 block.  RIL had projected output of 27 million cubic metres per day by 2010, but it has repeatedly failed to reach targets. (In 2011, BP bought a 30 percent stake in the field for $7.2 billion.)  Last year, with KG-D6 producing only 14 mmcm/d, the government’s allocation priority to the fertilizer industry meant that the allocation for power plants, which was cut from November 2011, was completely eliminated. At the time, curtailments to the 18.7 gigawatts of gas-fired power units were estimated at two-thirds of their needs, with an additional 8 GW of capacity nearing commissioning.  Refineries, steel plants, liquid petroleum gas plants and even city gas supplies also faced allocated natural gas cuts. Not all gas supplies are subject to government allocation, exceptions being mainly for imported gas.

In June 2013 the Union (central) Government announced a decision by the Cabinet Committee on Economic Affairs (CCEA) to approve pricing of domestic natural gas at an overage cost of imported liquefied natural gas (LNG) into India and international gas hub rates.  The new formula was to have come into effect on April 1, 2014, with an expected price about US$8.40 per million British thermal units (MMBtu) or double the current price in India. 

With national elections called this past spring, India’s election authority in March ordered the Ministry of Petroleum and Natural Gas to hold off on the scheduled April 1 gas price increase until after the new government took power.  The Bharativa Janata Party won a decisive victory over the Congress Party and Narendra Modi became Indian Prime Minister.

In late June, the new Government’s CCEA announced a three-month deferral of the scheduled gas price increases.  Share prices of Indian producers immediately dropped:  RIL by 3.7 percent, Oil and Natural Gas Corp. by 5.8 percent and Oil India Ltd. by 2.8 percent.  Late last month, the government established a panel of secretaries (senior civil servants) from four ministries:  Expenditure, Power, Fertilizer, and Petroleum & Natural Gas.  The panel will examine gaps in the “Rangarajan Formula,” the basis for the delayed increase, including use of heat value vs. volume, weighting of prices in the formula, assigning different prices based on exploration risk and difficulty, etc.  Once the panel consults with affected parties, it will offer its recommendations to the central government.   MPNG Minister Rajya Pradhan promised Parliament the government would present a new gas pricing formula by Sept. 30.

During more than a decade as Chief Minister (governor) of India’s western state of Gujarat, Modi and the BJP gained a reputation for favoring “development over the dole” and being more business-friendly than the Congress Party. Modi’s focus on industrialization and export-promotion in Gujarat may have led to unreasonable expectations when he moved from Gandhinagar to Delhi and from leading 62.7 million (a bit less than the combined populations of California and Texas) to 1.27 billion (nearly four times the U.S. population. 

Modi’s first Union (national) budget, presented in July, was panned by many as disappointing and lacking the vision of Modi’s campaign.  It did propose building 15,000 kilometres (9,375 miles) of pipelines to complete the national gas grid.  It also emphasized the reduction of fuel subsidies, but provided no details.  Thus, the recommendations of the intra-ministerial committee on natural gas pricing—and the Government’s response--may reveal how far Modi and the BJP are willing to move toward market pricing and away from continuing energy subsidies.

China, India Raise Gas Prices. Part 2--India.

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On June 27, the Government of India announced a decision by the Cabinet Committee on Economic Affairs (CCEA) to approve pricing of domestic natural gas at an overage cost of imported liquefied natural gas (LNG) into India and international gas hub rates.  The new formula comes into effect on April 1, 2014, at which time the price is expected to be about US$8.40 per million British thermal units (MMBtu) or double the current price.

The new pricing formula for each quarter will be calculated based on the 12-month trailing average price, with a lag of one month.  This means that the price for April through June 2014 will be calculated on the 12-month averages ending Dec. 31, 2013.  The newly approved gas pricing formula will be in effect for five years.

The impact of the natural gas price rise in India will differ greatly from a gas price hike China announced at about the same time: 

1.  Although both countries came to a similar price, in China the new price represents a 15 percent raise vs. a doubling in India.

2.  China’s gas price change was effective July 10, while India’s will not bite until April 1, 2014.

3.  While China consumes two and one-half times more gas than India (146 billion cubic metres vs. 55 bcm in 2012—BP), gas represents a larger share of total primary energy requirements in India (8.5%) than in China (4.8%)(BP:2012).

4.  Sectoral use of natural gas varies widely, with China using nearly 30 percent of its gas in residences and India nearly none.  In contrast, China’s non-energy use of gas (primarily refining and petrochemical production, especially fertilizers) amounted to 17 percent compared to 59 percent in India, where gas for fertilizer production is steeply subsidized (IEA:2009).  Finally, gas use in the electric power sector is minimal in China, while gas represents some 10 percent of India’s installed power capacity.

Although the decision to raise Indian wholesale gas prices was taken by the CCEA and not just the Ministry of Petroleum and Natural Gas (MPNG), other ministers lost no time in objecting.  The Ministry of Finance noted that Reliance Industries, Ltd. (RIL), led by Mukesh Ambani, had produced from its KG-D6 offshore gas field well below target and should have to sell targeted production, as well as the cumulative shortfall, at the old $4.20/MMBtu price.  MPNG head M. Veerappa Moily rejected the Finance Ministry critique, noting “There is no confusion; there is no vagueness.  And I don’t think there is scope for any interpretation whatsoever.”  India’s Planning Commission had been pushing for such a gas price boost for two and one-half years.

The Indian Power Ministry already called a meeting with the states and other stakeholders to seek suggestions on easing the impact of the proposed gas price jump.  The Power Ministry also has questioned setting the price in U.S. dollar terms, as that adds volatility given the depreciation of the Indian rupee (Rs).  Finance Minister P. Chidambaram has reassured the power and fertilizer sectors, which receive state-set allocations of natural gas at subsidized prices, that their concerns would be addressed before the price increase takes effect next year.

The power industry has borne the brunt of the production collapse at RIL’s Krishna-Godavari fields from nearly 70 million cubic metres of gas per day (2.4 billion cubic feet per day) in 2010 to some 14 mmcm/d recently.  RIL had committed 29.7 mmcm/d of KG-D6 gas production to 25 power plants, but in Nov. 2011, their allocation was reduced and in March 2013 cut off completely.  A July 18 meeting of the Empowered Group of Ministers, led by Defence Minister A.K. Antony, rejected an Oil & Gas Ministry proposal to abolish the priority ranking and instead confirmed the priority for the fertilizer industry, then liquefied petroleum gas production, power, and city gas.  Practically, this means that unless RIL can turn around KG-D6 production, only the fertilizer industry will be supplied with Krishna-Godavari gas. 

Currently only one-third of the 72 mmcm/d needed for the 18.7 gigawatts (GW) of gas-based power plants throughout India is being met; a further 8 GW of capacity is nearing commissioning without firm gas supplies.  Oil Minister Moily has urged the EGoM to explore other gas supply options for the power sector, including using uncontracted volumes produced by state-owned Oil and Natural Gas Corp. 

An analysis by Bank of America Merrill Lynch, reported a week after the CCEA gas price decision, suggested that the Government of India will collect some Rs 13,000 crore (US$ 2.2 billion) in higher taxes, royalties and dividends, particularly from state-owned gas producers ONGC and Oil India Ltd. (OIL).  Privately-owned RIL would pay about 10 percent of the increased central government revenues.  The analysis opined that much of the additional government revenue from the higher gas price would be funneled into subsidies to protect sectors such as fertilizer and power.

If the government keeps the cost of natural gas to the fertilizer industry unchanged, CRISIL (Credit Rating Information Services of India Limited)

estimates that, even after receiving the higher tax and royalty payments, the central government will lose an additional net Rs 2000-2500 crore (US$335-420 million) for subsidies just for the fertilizer sector.  During 2009-2011, Indian government subsidies for natural gas have varied from $2-3 billion.  This pales in comparison to oil subsidies, which leaped from $11.5 billion in 2009 to $30.9 billion in 2011 (IEA).

The higher natural gas prices should improve the incentive for exploration and development of domestic natural gas in India by domestic private and public companies, as well as foreign firms.  Repeated delays in formulating government policy on shale gas development have kept India from conducting its first shale gas tract leases, unlike China, which conducted its first shale gas bid round in June 2011 and its second in 2012 with 19 blocks awarded in January 2013.  This may not impact India dramatically as it has relatively modest shale gas resources of 2,718 bcm (96 tcf), compared with China, the global leader with 31,573 bcm (1115 tcf USEIA:2013).

The government decision to double natural gas prices represents nothing more than a belated nod to reality.  India increasingly must turn to imported LNG to meet growing, and still not fully satisfied, demand for natural gas.  Indian domestic gas production rose from 27 bcm in 2002 to 51 bcm in 2010, only to fall back to 40 bcm last year.  It commenced imports of LNG in 2004 and reached 20.5 bcm in 2012 (BP), making it the world’s fifth largest LNG importer.  Average prices of imported LNG run some $11-12/MMBtu or three times the current regulated natural gas price in India. 

The disconnect can be seen in the failure of Petronet LNG’s new terminal in Kochi to sign up customers.  The Rs 4200 crore (US$700 million) terminal, due to start operation next month, will initially operate at less than 10 percent of its 5 million tons (6.75 bcm) per year capacity.  Gas Authority of India, Ltd. is seeking renegotiation of its 1.5 MMTY deal for LNG from Australia’s Gorgon project, scheduled to start delivery to Kochi in 2015, as the cost delivered to GAIL customers could approach $17/MMBtu under the current contract.

On the demand side, the continuing subsidies for natural gas use in the power and fertilizer sectors will increase the already significant burden on the central government budget deficit.  Union and state governments in India share a constant concern over feeding the population and an attitude that power—when and where it’s available—should be a “free good,” especially in the agricultural sector.  With these political pressures, it will be difficult to restrain, less alone reduce, gas price subsidies and government volume allocations.   Ironically, this will only expand the gap between notional demand for gas in India and available supply; continue curtailed and unreliable electric power; and maintain coal as the dominant and most polluting fuel.  The timing of elections for the Union Parliament—May 2014, the month after the natural gas price rises—makes these issues even touchier.

India has taken an important step to bring its domestic producer prices of natural gas closer to world levels.  The next important step, admittedly a much more difficult one, is to increase the natural gas price for domestic consumers.

Getting Started

This is my first attempt to start a blog. I retired from the U.S. Department of Energy in 2006, where I was Director for European and Asian Affairs, and then set up a consulting company, International Risk Strategies, located in Tampa, Florida. You can read more about the company and me on the company website. I shall try to pass on interesting items that are not covered in the usual news sources and shall look forward to reader feedback.