Shale gas

A strategic imperative
for India

October 2010
www.deloitte.com/in
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Introduction
The world is facing two energy problems in the medium
to long term, climate change and peak oil. Compared to
the news about new discoveries, the depleting oilfields
are on the rise. Major oil companies are going farther
into the ocean to dig deeper in their quest for the fossil
fuels. A few have even started their exploration activities
in the Arctic Ocean. Difficult geographical locations
seem to be the norm for the exploration companies,
increasing the costs of the operations and hence the
costs of fossil fuel itself. With such a grim outlook for
the future, shale gas can ease the demand pressure, at
least temporarily. The past decade has seen the natural
gas price peak, renewing the interest in development
of ‘unconventional’ gas resources, such as coal-bed
methane, tight gas, and shale gas.
In India too, energy ‘demand vs supply’ gap has
increased the focus on developing all possible energy
sources. Unconventional gas resources, including shale
gas has the potential to contribute significantly for a
few decades. Shale is the common name for rock that
was once layers of clay or mud. Due to geological
circumstances, these layers were compressed into a
fine-grained sedimentary rock. The gas which is trapped
in this rock formation is called shale gas. In terms of
its chemical makeup, shale gas is typically a dry gas
primarily composed of methane.
In many organic shale reservoirs, the natural gas is
stored as free gas in fractures. All rocks have pore space
that can hold water or gases. In Shale, the grains fit
together so tightly that there is little movement of water
or gas through the rock. In order to release the gas,
especially in commercial quantities, the shale must either
have natural fractures, or fractures must be created in
the rocks to provide suitable permeability.
Gas was found in the shale all around the world
for a long time, but its extraction was considered
economically unviable because of the low permeability
of shale. Due to the low permeability, gas would not
flow easily and therefore extraction was difficult. A
large share of the focus in the past century was on
exploring the highly permeable seams of sandstone and
limestone.
Things changed for the better in the 1990s.When using
a new extraction technology, a tight shale deposit could
be cracked open by injecting water into the formation
at high pressure. Water is mixed with sand to keep the
cracks open and therefore increase the permeability of
the formation, enabling the gas to flow. Shale deposits
have limited depth but cover a large region. Vertical
drilling could only capture a zone of 20-30 meters and
therefore only a small amount of gas could be produced
per well. Over the past couple of decades, the drilling
techniques evolved and horizontal drilling
is possible today. Horizontal drilling enables the well
to cover a shale zone for hundreds of meters, thereby
increasing the gas produced per well. This advancement
in technology has improved the economics of shale gas,
and has changed the US gas market scenario drastically.
Shale gas A strategic imperative for India 3
Learning from the USA

Shale gas has existed in the US for quite some time now.
Over the years, the technology has been developed, but
this technology was not economically attractive. The low
natural gas prices were not encouraging the investors to
pump in their money into a nascent industry.

Primarily three factors have come together in the recent

past to make shale gas more attractive,
• Advancements in the horizontal drilling technology
• Advancements in the hydraulic fracturing technology
• A surge in the natural gas prices in the past few years
as a result of significant demand pressures

Fort Worth Barnett, Fayetteville, Antrim, Arkoma

Woodford, Marcellus, & Haynesville are some of the
shale basins in the USA, where the shale gas industry
has prospered. Some of the factors that led to the
success of shale gas in the USA can be attributed to
favourable geology, large resources play, and persistent
Figure 2 United States Shale gas basins (Source: Shale Gas
R&D supported by US Department of Energy to help Primer, US DOE, 2009)
improve recovery techniques. Other than the factors
mentioned above, factors such as, deregulated natural
gas price, well developed pipeline infrastructure, a
well developed gas market, a stable fiscal regime, easy
leasing framework, and tax credits, took the shale gas
industry to new heights.

USA has revolutionized the shale gas and is responsible

for technological and economical advantages in the
shale gas production today. This shale gas revolution
has turned USA from a gas importing country to a gas
exporting country (to Japan). 90% of the global shale
gas is currently produced by the USA.

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Exploring Shale Gas
potential in India

Though Shale gas has been on the global energy map

since the 1950s, it has only been technologically and
economically accessible since the 90s. Higher Natural
gas prices in the years following 2000 and advances in
hydraulic fracturing and horizontal drilling have made
shale gas profitable in the past decade. Currently natural
gas trades at around $4-6/mmBTu on NYMEX making
shale gas an important asset to have in an energy
company’s asset portfolio.

Oil is currently around $70-75/barrel, and could return

to the $150/barrel it saw during its peak in 2008.
Natural gas is currently at $4-6/mmBTu, but it hit its
price peak in June 2008 when it was trading at $13/
mmBTu on NYMEX. Recent volatility in the conventional
fuel markets highlighted the importance of shale gas
in a country’s energy portfolio and self-sufficiency. The
price of gas produced from KG basin under NELP is set
at $4.2/mmBTu and the price of C-series gas at $5.25/
mmBTu. While the import prices paid to LNG imports
which depend on international gas prices were as high
as $16/mmBTu. Comparing the price between shale gas
and natural gas and the promise shale gas holds in the
future, one would expect a flourishing shale gas industry
in India. Largely being an oil importing country, India’s
energy security is pivotal in sustaining its economic
growth in the next few decades. As a part of the plan to
bridge the energy deficit, India is ready to begin its foray
into shale gas.

India plans to open up the shale gas exploration

acreages by the end of 2011. The recent MoU with USA
Sedimentary basins of Indian Subcontinent on shale gas is likely to help in reserve assessment of
certain shale basins in India.

In theory, a number of sedimentary basins (Gangetic

plain, Gujarat, Rajasthan, Andhra Pradesh & other
coastal areas) in India, including the hydrocarbon
bearing ones – Cambay, Assam-Arkana, & Damodar
– have large shale deposits. Though all the shale
deposits are not ideal for shale gas exploration,
substantial potential for gas is expected from these
basins. Technological collaboration will help in using
sophisticated models to pick out most prolific places to
start drilling.

Shale gas A strategic imperative for India 5

Policing the Policy
India’s current gas demand is limited by its access to
gas supplies based on domestic production and imports
availability.
According to the current policy, the oil companies in
India are allowed to produce only conventional oil and
gas from their exploration blocks. A separate bidding
round is required for the unconventional sources,
as these are considered unwarranted windfall. Oil
companies, while drilling for oil, have hit thick seams
of coal and shale, but do not show interest in testing
because they are not allowed to do so.
Some of the imperative considerations are.
• A policy that allows oil companies drilling for
conventional oil and natural gas to investigate and
produce shale gas & Coal bed methane along with
natural gas. This change might revive old wells which
have been declared as commercially not viable and
also increase the energy capacity of the country.
• A robust shale gas policy should be in place before
awarding the blocks. Speculative Seismic exploration
should be done to identify high potential shale gas
blocks.
• Market driven gas pricing model
• The government assistance to public and the
private sector companies in importing the shale gas
technology to India by providing incentives.
Importance of diplomatic relationships
Shale gas has been the game changer. It changed
United States of America from a gas importing country
to a gas exporting country in the past decade. World
eminent energy economist Daniel Yergin, author to the
Pulitzer Prize winning ‘The Prize’, has referred to shale
gas development as “the biggest energy innovation of
the decade.” The companies worldwide are looking to
invest in the shale gas business and are considering it as
a lucrative business.
Some of the regions with significant shale gas reserve :
Country Major Shale Gas Prospect
USA Marcellus, New Albany, Barnett,
Haynesville Shale
Australia Amadeus, Cooper and Georgina
Europe Alum, Silurian and Mikulov
New Zealand Whangai Shale
China Sichuan Shale
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To achieve the reliable supply of shale gas, Indian
companies have already forayed into countries like
USA and Australia. Focusing on the strategic tie-up
with countries like Australia, Europe, New Zealand and
China will prove beneficial in the near future. Having
technological advances & tested business models in the
shale gas industry, the countries mentioned before will
help India leverage their technology and skills to develop
the shale reserve in India. The strategic tie up of the
Indian companies with the foreign companies can be
leveraged on the policy level to encourage and attract
greater foreign and domestic investment in the Indian
shale gas business.
Shale gas and Carbon Credits
Natural gas, being the clean source of energy compared
to coal or crude oil, has the potential to mitigate the
environmental degradation. The countries all over the
globe are reducing their carbon footprint as mandated/
agree upon at the Copenhagen Summit. The world is
aware that maximum percentage of the global carbon
footprint will be of the emerging nations, primarily
China and India. It is therefore very important that the
developed countries bring the necessary funding and
technology into these emerging nations to rapidly grow
the shale gas industry. Natural gas can offset the CO2
emissions of the crude oil and coal, and pave way to a
cleaner and greener world.
Domestic Vs Imported Shale gas
According to the preliminary estimates, India’s shale gas
reserve may be larger than the conventional gas deposit
and has the potential of being the new and significant
contributor to gas supply. Supply of natural gas in India
lags behind demand and by 2015 the gas demand is
expected to rise to 120 billion cubic meters (BCM) a year
from 62 BCM per year in 2010.
The government and the industry should join hands
to exploit the domestic reserves as it would be more
economical compared to imports.
Amassing the technical Knowledge for a
competitive advantage
Acquiring overseas assets for exploring the shale gas
reserve is important as it will help the Indian companies
gaining the technical knowhow and the skills required
to operate the business. Historically, India has not been
very successful in attracting the global super majors in
the oil & gas sector. Assuming that history may repeat
itself, companies cannot bank on experiential learning,
 which occurs over a period of time. Therefore it is in the best interests of all the domestic companies, who have
an interest in the shale gas business, to look at reserves abroad. Reliance Industries took the lead and paid few
billion dollars for 40-60% stake in various shale gas sources in USA. Bharat Petro Resources has also entered into an
agreement with Australia’s Norwest energy to pick up a stake in two shale gas blocks from the Perth Basin. Other
companies are also looking to invest in acquiring knowledge and assets.

Shale Gas Development Cycle

• Award of mining lease – Oilfields (Regulation &

Development) Act & PNG Rules provide broad framework
• Terms for award - needs to be developed
• Selection of Fiscal regime – Royalty vs. Profit Sharing vs. JV
• Dynamic vs. Static fiscal regime – aligned to development
needs
• Whether current Permit regime is facilitative

Mineral leasing India have regulatory regime in place

with adequate Oil & Gas development
and permits experience – Do Shale gas developers need
Abandonment / Reclamation requirements any more favourable regime to carry out
needs to be calibrated for restoration Road and pad operation in time.
of surface area especially in populated Abandonment
regions – a balanced framework to construction
make local populace a stakeholder in the
operations

Regulatory framework Facilitative environment for

Facilitative environment for
availability of W/O rigs, special
treatment of work over expenses,
period of the lease – to encourage
maximum shale gas exploitation
from a lease area
management of drilling costs and
Drilling and standards for well completion –
Work-over
completion framework in place?
Hydraulic
Production fracturing Technical, safety and environmental standards for
hydro-Fracturing process including prevention of
collateral damage to other geological resources,
sourcing of water and disposal thereof - Do we
have regulations in place?

Utilization & marketing of

production, transportation and
pricing – does existing regulation
attractive enough for shale gas
developers?

Shale gas A strategic imperative for India 7

Key challenges

Following are some of the key points that require of the leases and competing demands for revenue.
deliberation before awarding the shale gas blocks: But since the shale gas economics have not yet been
• Defining geological conditions: Care should be tested in India, it may be prudent to run an economic
taken to define clearly what an unconventional viability model or incentives based approach before
condition is. The definition should consider all the freezing commercial and fiscal framework.
parameters that define a hydrocarbon due to shale • Availability of water and environmental issues:
gas condition. There may be situations when both Shale gas operations would require large quantities of
shale and conventional hydrocarbon resources lie water for hydraulic fracturing process. Unavailability
in the same vertical zone. In such situations, the of water sources for the awarded blocks could pose
definition should serve as a guide to clear any dispute logistical issues and mean additional cost. Guidelines
that might arise. Globally accepted parameters to prevent the contamination of aquifers and limits
should be considered for defining the unconventional on well pads and well density in populated areas will
condition. minimize the environmental impact.
• Classification of all unconventional gas resources:
Unconventional gas resources come in various forms
such as tight gas, coal bed methane, and shale gas.
All these unconventional resources require similar
infrastructure for development. A single classification
may help lowering cost of production by providing
economy of scale for the operations.
• Criterion for selection of the developer: Shale
gas geology is in its infancy in India and one cannot
be sure if the shale gas economics are beneficial
until a few wells are drilled. The financial criteria
may consider a strong balance sheet and sufficient
cash reserves. Technical criterion could consider a
technological alliance with an overseas entity or
availability of technical experts or understanding of
technical knowhow.
• Acreages size and terms of lease: A block below
the threshold area may lead to slapdash approach in
resource exploitation and prevent it from becoming
a pure capital market play. The right size of the shale
gas blocks will invite interest from established entities.
The terms of the lease should give adequate period
for the complete exploration of the awarded blocks.
Though shale gas extraction seems more controllable
than producing gas from a conventional hydrocarbon
reservoir, but the term of the lease should be
adequate for completion of commercial exploitation
without much slack.
• De-regulation framework: Gas price freedom/
deregulation in the US has been mentioned as one
of the turning point for Shale gas success. Complete
freedom to price and sell shale gas within India will
be of key interest to established players.
• Fiscal Regime: A progressive fiscal regime with tax
credit for inputs and time linked royalty regime will
entice the established players. Ideally, income tax
exemptions may be avoided given the long tenor

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Conclusions

Everyone following the new developments in the Shale

gas industry knows about its importance in the future.
Shale gas is definitely an opportunity, if harnessed
effectively, can bring about a change in the energy
mix of the country. The effects of shale gas can be far
reaching and therefore it needs to be given adequate
importance. There are some kinks and considerations
that need to be worked out before the shale gas takes
off economically. The industry and the government
need to work together to come up with a shale gas
exploration policy that not only encourages foreign
investment but also encourages domestic economic
growth.

Shale gas A strategic imperative for India 9

 Contributors
Neeraj Gupta
He is a Senior Professional with the Energy &
Resources practice of Deloitte. He has over sixteen
years of international experience with leading oil
& gas companies. He holds an integrated Master’s
degree from Indian Institute of Technology at
Roorkee.

Vikas Reddy
He is an Assistant Manager with the Energy &
Resources practice of Deloitte. He has over three
years of experience in oilfield operations and
consulting. He holds an integrated Dual degree
(Bachelor’s and Master’s) in Mechanical Engineering
from Indian Institute of Technology at Mumbai.

Hima Bindu Yadlapalli

She is a Manager in Deloitte’s Strategy & Operations
team. With over 10 years of professional experience,
she focuses on providing consulting services to
clients in the Energy & Resources sector. She is an
MBA from SJM-School of Management, IIT Bombay
and holds an Engineering degree from National
Institute of Technology, Warangal.

References

Economic Times, 25th Aug, 2010 “Exploit potential of shale gas: US to India and China”

Economic Times, 20th Apr, 2010 “Gas still remains a pipe dream”

Live Mint, 30th Jun, 2010 “India open for shale gas exploration”

The Hindu, 26th Aug, 2010 “India-U.S. shale gas exploration initiatives set to advance”

My Digital FC, 19th May, 2010 “ONGC embarks on shale gas exploration”

Deccan Herald, 13th Jan, 2010 “Shale gas: A game changer India should turn to”

Financial Express, 9th Aug, 2010 “Why not go for shale gas?”

Reuters, 17th Jun, 2010 “Shale gas and its challenges”

Energy Information Administration www.eia.doe.gov

International Energy Agency www.iea.org

Money Control, 17th Oct, 2009 “ONGC eyes gas from Shale, pilot project to start in 2011”

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Shale gas A strategic imperative for India 11
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