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.

China to Raise Some Natural Gas Prices

China's National Development and Reform Commission announced a more than 20 percent increase in natural gas prices for commercial and industrial users as of Sept. 1, along with removing price controls on imported liquefied natural gas, shale gas and coal bed methane.  The NDRC has a difficult balance to strike between allowing prices to rise sufficiently to encourage expanded domestic gas production and gas import projects, while keeping prices low enough to expand demand to meet environmental goals.  Full story on China's gas prices changes and strategy here.

China Slashes Shale Gas Target

Reuters, citing a Chinese website, reports that China has dropped its target of 60-80 billion cubic metres of shale gas production in 2020 to only 30 bcm.  A likely boost for China's LNG import requirements.  Full story here.

China Shale Gas Resources Redux

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Re the June 25, 2012, article below, “Shale Gas Resources Drop, China Next?”, the U.S. Energy Information Administration has lowered its estimate of China’s shale gas resources by 12.5 percent.  The EIA June 2013 Technically Recoverable Shale Oil and Shale Gas Resources, a revision of its April 2011 study, lowered China’s shale gas TRR to 1,115 trillion cubic feet (TCF~31.6 trillion cubic metres) from 1275 Tcf in 2011.  The EIA analysis, performed by Advanced Resources International, Inc., summed new estimates for the Sichuan (626 Tcf), Tarim (216 Tcf), Junggar (36 Tcf) and Songliao (16 Tcf) basins with 222 Tcf from smaller, more structurally complex Yangtze Platform, Jianghan and Subei basins. 

EIA based its revision on “…better information regarding the total organic content and geologic complexity … of the shale gas resource in the Qiongzhusi formation in the Sichuan Basin and Lower Cambrian shales in the Tarim Basin. The Qiongzhusi Shale gas resource estimate was reduced from 349 trillion cubic feet in the 2011 report to 125 trillion cubic feet in this report. The lower estimate resulted from the prospective area being reduced from 56,875 square miles to 6,500 square miles. Similarly, the prospective area of the Lower Cambrian shales was reduced from 53,560 square miles in 2011 to 6,520 square miles in the current report, resulting in a reduction in the shale gas estimate from 359 trillion cubic feet in 2011 to 44 trillion cubic feet now.”

While noting the country-wide shale gas development problems in China of complex geology, limited technological and equipment services, water resource constraints and lack of infrastructure, the EIA observed that the Sichuan basin—which holds more than half of China’s shale gas TRR—has existing pipelines, abundant surface water supplies and close proximity to major municipal markets.  In June, China National Petroleum Corp. (CNPC) commenced construction of the country’s first dedicated shale gas pipeline.  The 92.8 kilometre (57.7 miles) conduit will link Changning block gas wells to an existing gas pipeline that connects with neighboring Yunnan Province.  The new pipe’s designed capacity is 4.5 mmcm (159 mmcf) per day.

EIA’s estimate of China’s technically recoverable shale gas resources still exceeds those of China’s Ministry of Land Resources, noted in the article below.  Further, the EIA/ARI report emphasizes that future exploration and development drilling in China will affect shale gas TRR estimates, and could increase these appraisals.  So while China’s early targets for shale gas production of 6.5 bcm in 2015 and 60-100 bcm in 2020 appear unrealistic, China continues to possess by far the world’s largest shale gas resources.  This resource endowment, combined with recent increases in producer prices for natural gas (see July 16 article below) and a government commitment to reduce the growth of emissions from energy consumption, holds hope for the long-term future of shale gas development in China.

Shale Gas Resources Drop, China Next?

            The U.S. Government today nearly halved its estimate of U.S. shale gas resources.  This follows an even more drastic decline in Poland’s shale gas resources by its national geological institute.  As China starts serious drilling of its shale gas resources, will its optimistic resource assessment also drop?

            In April 2011, the Energy Information Administration of the U.S. Department of Energy released World Shale Gas Resources:  An Initial Assessment of 14 Regions Outside of the United States. That ground-breaking study suggested that global shale gas technically recoverable resources (TRR) of 6622 trillion cubic feet (tcf) roughly equaled global proved natural gas reserves.  TRR clearly is a more speculative measure than proved reserves, which define known gas that can be economically produced with current technology.  Still, the TRR figure firmly established global shale gas as a worldwide energy sector game changer.

            World Shale Gas Resources crowned China as king with 1275 tcf of TRR, followed by the U.S. with 862 tcf, Argentina with 774 tcf, and Mexico at 681.  The study found the largest shale gas resources in Europe in Poland (187 tcf) and France (180 tcf).

             In its 2012 Annual Energy Outlook, released today (June 25), the EIA lowered its estimate of U.S. shale gas TRR to 482 tcf—a 44 percent decline.  The fall resulted largely from a 67 percent drop in EIA’s estimate of TRR in the 100,000 square mile Marcellus shale that spreads across eight states from Tennessee to New York, but with most drilling in Pennsylvania and West Virginia.  (New York imposed a moratorium on shale gas exploitation, pending an environmental assessment.)  EIA followed a revision by the U.S. Geological Survey of the Marcellus shale.  EIA emphasized that further drilling could result in a future upward revision of resources and that the lower TRR does not directly correlate to projected production.

            The Polish Geological Institute announced its Assessment of shale gas and shale oil resources in Poland—First report on March 21.  The PGI emphasized that the report should be considered only a conservative, initial estimate as it was based on 39 wells drilled between 1950 and 1990.  Still, Minister Piotr Woźniak, Poland’s Chief Geologist, noted that only 22 wells had been completed since 2010 and a mere 14 were planned for 2012, compared to the thousands drilled annually in the U.S.  The PGI estimated the most probable level of Polish shale gas resources between 346.1 billion cubic metres (12.2 tcf) and 767.9 bcm (27.1 tcf).  Even the high end of the range is 85.5 percent lower than EIA’s estimate in World Shale Gas Resources a year earlier.  Last week the Gazeta Wyborcza reported that ExxonMobil would abandon its shale gas exploration projects in Poland after test wells failed to produce commercial results.

            So back to China.  Already in March 2012, China’s Ministry of Land and Resources scaled back its estimate of the country’s shale gas TRR from 31 tcm (1095 tcf) to 25.1 tcm (886 tcf) based on its most extensive appraisal to date.  The MLR noted that the complicated geology of its shale gas reserves and the relative inexperience of its companies would make shale gas production difficult.  Others have cited China’s regulatory regime, including administrative (versus market) pricing of gas, the lack of pipeline infrastructure, and the fact that some of China’s large shale gas resources, such as those in Xinjiang, are in semi-arid areas, as potential impediments.  Nonetheless, the government of China has moved forward on leasing shale gas tracts.  China’s big three—China National Petroleum Corp./PetroChina, China National Offshore Oil Corp. and Sinopec—all have purchased North American shale gas assets to learn the technology and have brought in Shell, Chevron, BP and others to work Chinese basins.

            China’s current Five Year Plan calls for production of 6.5 bcm (230 bcf) by 2015 from 19 major shale gas regions across the country.  By 2020, China’s National Development and Planning Commission expects shale gas production to jump to between 60 and 100 bcm (2 to 3.5 trillion cubic feet). 

            Whether or not China meets its ambitious shale gas production plans, the U.S. and Polish cases suggest that further drilling in China may well mean further reductions in the estimates of China’s overall shale gas resource.

Shale Gas Opportunities for US Independents in China?

Toshi Yoshida, corporate and energy partner at the law firm of Mayer Brown LLP, recently told E&P Online that China's shale gas development holds significant opportunity for U.S. independents who have extensive experience in developing America's shale gas resources. Read here.
I would caution that there are significant risks in such ventures: First, energy is a "strategic sector" in China so that foreign participation is curtailed. Note that so far no foreign companies have been allowed to bid on shale gas lease auctions in China, even as minority partners to Chinese firms. There have been suggestions that this might change, but still with foreign companies as minority partners. Second, Chinese hypersensitivity in this sector was amply demonstrated by the imprisonment of U.S. geologist Xue Feng for espionage for acquiring Chinese geophysical data that anywhere else would be considered purely commercial. Third, China's new regulations have increased pressure on foreign firms to provide Chinese partners with proprietary technology as a requirement of market entry; and China's long-standing failure to protect intellectual property is well documented. Finally, as the recent Yahoo-Alibaba/Alipay case demonstrated, dealings with a Chinese partner may be less than transparent and foreign partners cannot expect protection under the Chinese legal system. So I would strongly suggest that U.S. independents carefully weigh the considerable risks against any possible rewards before investing their capital (financial or intellectual) in China. [Disclosure: I own stock in Chesapeake Energy and Devon Energy.]

PetroChina Pushes Shale Gas

Further to my post below, Bloomberg is reporting that PetroChina President Zhou Jiping yesterday pledged to accelerate his company's oil and gas development, noting that "The nuclear plant closure in Japan will boost its demand for oil and gas. That will have a pretty big impact as Japan is the world's largest liquefied natural gas importer." Read full article here.

Japan Disaster to Spur Asian Shale Gas

The Financial Times Monday noted that as Tokyo Electric Power Co. (TEPCO) lost 9,700 megawatts of nuclear power from Friday’s earthquake and tsunami—nearly 20 percent of Japan’s total electricity generating capacity—British LNG (liquefied natural gas) import prices spiked 12 percent. Even if Japanese authorities do not shut down other nuclear facilities, the loss of these facilities means Japanese electric utilities will have to find additional oil, coal and LNG to generate power. Perhaps for an extended period.
An earthquake at TEPCO’s Kashiwazaki-Kariwa nuclear plant in July 2007 forced a nearly two-year-long shutdown, sending TEPCO scrambling to increase its purchases of crude, fuel oil and LNG. While the 2008 recession lowered TEPCO customer power demand in 2009, the 2008 spike in world oil prices greatly boosted the price of crude, fuel oil and LNG, which in Japan’s contracts is linked to oil. The additional annual cost for these fuel purchases was estimated at the time at more than 70 billion yen (US$ 900 million).
China and India have just begun major LNG import programs. Since 2006, China has constructed four LNG receiving terminals, pushing LNG imports to nearly 10 percent of total Chinese gas supplies. Chinese companies are building another four terminals, and several more are under consideration, as are expansions of existing terminals at Shenzen, Fujian and Shanghai. Shell and Petronet operate LNG receiving terminals in India’s Gujarat State. Additional terminals at Dahbol and Kochi are expected on stream in 2011 and 2012, with plants and Ennore, Mudra, Mangalore and Dighi Port possible.
Both China and India also have stepped up their pursuit of domestic shale gas. State-owned China National Offshore Oil Corp. and PetroChina have made mutli-billion dollar buys of shale gas properties in Canada and the U.S. India’s privately owned Reliance Industries has purchased substantial shale gas assets in the Marcellus and Eagle Ford shale gas basins in the U.S. Additionally, both China and India have begun to explore their domestic shale gas resources and plan to auction domestic shale gas leases this year.
China and India both control the price of domestic natural gas—well below the current LNG import price. A step increase in LNG import prices, caused by TEPCO’s sudden and sustained need for alternative generation fuels, will force both China and India to reconsider LNG's role in their energy mix and propel both to accelerate their domestic shale gas programs.