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Shale gas is in need of a policy in India  

Tapping shale gas

Sizeable shale gas finds are encouraging. But the government would have to tread carefully between fiscal policy and green concerns.

Oil industry has an adage – while the 20th century belonged to oil, the 21{+s}{+t} century will be for gas - shale gas to be more precise! The US is a prime example of what shale gas can do to gas and oil markets. From a key importer, it is now expected to be a key exporter. In Europe as well, early estimates of shale gas reserves could actually alter international diplomacy. Much like the US and Europe, India too struggles to quench its gas thirst. While the demand for gas defies gravity, supplies are not easily forthcoming — KG basin included. Even when they are, prices act as a hindrance.

It seems, after all, that geological factors might transform India's destiny. Initial tests show that India is endowed with significant shale gas resources. Schlumberger, an international service major, pegs India's initial in-place shale gas reserves at 300 -2100 TCF—much higher than our current gas reserves of about 39.4 TCF according to BP Statistical Review. India suddenly is in the league. Perhaps, it can change the very characteristic of an energy-intensive economy. However, we will have to be prudent. Merely being endowed with a resource will not ensure prosperity for the landlord (Government of India). That would largely be governed by how we choose to monetise the resource.

The Government is serious. The Minister of State for Petroleum and Natural Gas, in mid-March, informed the Lok Sabha in a written reply that the government has initiated action to identify prospective areas of shale gas resources as well as to formulate a policy for its exploration and exploitation. However, the key questions that needs to be answered: Does the government have the necessary institutional capabilities to monetise this resource? Can we expect it to come clean on key fiscal parameters?

Unless we have unambiguous policies, shale gas will merely remain a prospect. Apart from the overall policy framework, it would be imperative to pay special attention to the design of fiscal policy and environmental norms that could possibly internalise the externalities of shale gas development. Thus, success of the Indian shale gas story would largely be a function of our policy.

Fiscal policy

It is imperative that the policy has absolute clarity. The single most crucial factor would be the regulatory freedom on pricing. Today, when a field produces crude oil, the government allows pricing at arm's length. But if the same field produces gas, the government says — I would tell you what's best for you! This already has dissuaded international majors. In the eventuality, if subsidies are inevitable, let the government bear the cost rather than the players. Shale gas, unlike conventional gas, will require substantial interventions from the international majors who have the right technological prowess. Similarly, any end-marketing stipulations would be a no-brainer.

Given the positive externality, the government can extend the tax holiday vis-a-vis its conventional seven-year horizon. In a nutshell, we will have to appease the majors, so that we can retreat from a gas-deficit nation. Shale gas wells, invariably, exhibit an early peak production and then a rapid decline. Moreover, according to the IEA, the variation in productivity from well to well is significantly greater than is usually encountered in conventional reservoirs. Similarly, the interplay between investments, production and cash flow for shale gas is very different vis-a-vis conventional gas. Shale gas development and production is not time-consuming, and players have the potential to act as a swing player. These peculiar characteristics of shale gas will affect the profile of “profit gas”. The government will do well to be more accommodative and devise a dynamic fiscal policy.

Current Indian regulations don't allow companies to produce unconventional oil and gas from licences granted for conventional sources. The new shale gas policy should provide incentives to companies that are developing conventional resources to look for and develop shale resources as well. However, this would require tweaking our existing NELP .

Negative externalities

Perhaps, the biggest challenge would be to address the environmental implications of shale gas development. Environmental externalities of shale gas have been a major impediment to its rapid penetration across regions. Shale gas development is water-intensive. According to preliminary estimates, more than five million gallons of water is required per well. Moreover, shale gas development generates humongous quantities of spent water. Disquietingly, the spent water contains chemical residues and traces of some radioactive elements that occur inside the geological formations.

Re-injection of spent water is one solution; few countries have already halted the further development of shale blocks, it is fraught with risk as contamination of groundwater aquifers is a high probability. While the US Safe Drinking Water Act excluded activities such as injection of fluids in hydraulic fracturing, a key constituent of shale gas development, it is important that we implement best practices. In this regard, the recent Memorandum of Understanding with the US can possibly come to our aid. Specifically for India, the re-injection Act would need amendment. The current re-injection Act requires the re-injected fluid to comply only with respect to suspended solids, oil and grease.

Strangely, it doesn't include dissolved chemicals — a key constituent of spent water. It would also be important that the government mandates companies to disclose the chemical composition, if not the actual formula, of all the chemicals that would be utilised in fracturing. This would help better regulate the environmental implications. Thus, the government would have to tread carefully between fiscal policy and environmental stipulations. The end goal should be to ensure that the policy is not a zero-sum game. Unless these specific sustainable solutions are addressed upfront, it would be yet another case of a regulatory failure. Significant investments have already been committed for shale gas development across regions, and thus, in a way, we are late starters. The government, through the right policy framework, should ensure that we no longer remain in a gas-deficit realm.

Source ………….Abhishek Shukla and Ankur Sharma…..from the pages of HINDU BUSINESS LINE newspaper.

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