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DEW Journal November 2010 technology

Shale Gas

Shale gas-expanding India’s gas frontier?


Samir Verma, Senior Manager, Schlumberger Business Consulting, India, Asia
Shubha Shanthamurthy, Manager, Schlumberger Business Consulting, Europe, CIS & Africa

The exploitation of shale gas resources is garnering increasing attention in India, which relies
on oil imports to fuel its growing economy. In November, India signed a memorandum of
understanding with the U.S. Geological Survey for technical assistance to assess shale gas
resources and advance energy cooperation between the two countries. ONGC, India’s largest
upstream player, is drilling a series of pilot shale gas wells in the Damodar basin. Reliance
Industries, the country’s biggest gas producer, recently spent $3.5 billion on three shale gas
projects in the United States – some say the deals were as much to acquire shale gas technology
and know-how than simply the assets. But other observers believe India’s shale gas timelines
are too aggressive and need to reflect the enormous differences between the evolving Indian
gas market and the mature U.S. sector. So, is shale gas a real opportunity for India to feed the
next generation of gas power plants or is it a pipe-dream? What should regulators and operators
do to avoid the experience of coal bed methane (CBM), which after several rounds of auctions
is contributing only a miniscule 5 per cent of the Indian natural gas supplies? How should the
regulators create a conducive regulatory environment? How should prospective shale gas
operators, e.g. power generators and exploration and production (E&P) companies, approach
their shale gas strategy?
In this article, Samir Verma and Shubha Shanthamurthy of Schlumberger Business
Consulting share lessons from the United States and Europe, and give their perspectives on
how prospective Indian shale gas operators should position themselves for success, and what
the authorities can do to create a favorable environment for shale gas development.

U.S. – Not a Blueprint for India there is a deep pool of experienced field personnel and
The North American shale gas industry has been geoscientists whereas India’s skill pool is much smaller
evolving over the last 20 years. Early investigations and has a longer time-to-autonomy. Accessing and
identified shale gas as a potential resource in the early ramping up the technical and project management skills
1980s, but it wasn’t until the 1990s that the technology is even more critical when looking at unconventional
became available to produce the gas at commercial rates. gas because the production profile of shale gas wells is
While technology is transferable, there are many shorter and steeper than for conventional wells (see
significant differences between the U.S. model and exhibit) and hence drilling campaigns have to be closely
conditions in India. These differences need to be coordinated with gas evacuation projects. In case of
identified and incorporated into business models and conventional projects, a delay of six months to a year in
regulations if shale gas is to transform India’s energy
balance.
Shale gas requires huge physical and technical resources.
In the United States, huge physical and technical
resources were deployed in regions already familiar to
E&P activity from the well-established oil industry. In
2008, 1,400-1,500 rigs drilled close to 35,000 natural gas
wells in the United States, while in India, fewer than 100
land rigs (excluding workover rigs) drilled less than 650
wells in the same period. The size of the Indian E&P
industry is an order of magnitude smaller to that of the
United States, and Indian E&P companies would need
scale to bring down costs. Moreover, given the long
history of the oil and gas industry in the United States,

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technology DEW Journal November 2010

Shale Gas

Competition and innovation are populated areas. In India, where the population density
critical. The U.S. shale gas is tenfold that of the United States, shale gas production
may face local opposition because of disruption to
revolution would not have been communities from drilling activities. There are also
possible without innovation, differences in lease agreements: the sub-surface rights
such as the adoption of vest with the government in India, while the surface
directional drilling for on-shore rights lay with the landowner. Therefore, landowners
wells, multiple fracturing and in India are unlikely to benefit directly from the
development of shale gas resources. In the United States,
Flexible Factory. both the surface rights and the mineral rights rest mostly
the evacuation infrastructure would impact the with landowners, who may sell their rights to
economics but not necessarily enough to result in developers.
cancellation, the impact is more severe for shale gas. Deep and liquid gas market. India’s domestic energy
Competition and innovation are critical. The U.S. shale markets are evolving but are nowhere near the
gas revolution would not have been possible without sophistication of North America, where gas is traded on
innovation, such as the adoption of directional drilling the physical and futures markets. U.S. companies are
for on-shore wells, multiple fracturing and Flexible able to sell their gas easily into the system and use the
Factory 1 . The North American shale gas pioneering futures market to support heavy drilling programs that
companies were largely small and nimble; they learned require constant re-investment.
quickly from their experiences and reduced costs. India
lacks both the small wildcat exploration firms that The European Experience
spearheaded shale gas exploitation in the United States, There are valuable lessons to be learnt from the
and the competing oilfield services firms that support development of the shale gas industry in Europe. India
them. This competition in the service sector was vital in is more aligned to Europe than North America in several
aiding the operators to drive down costs. of the factors discussed above. The onshore E&P industry
Sub-surface understanding is key to field development in Europe is much smaller than that in the United States
and the identification of sweet spots. Oil and gas and is fragmented by national boundaries. European
exploration has a long and deep history in the United shale basins are both more heterogeneous and less
States, and there is substantial sub-surface data available explored when compared to North America. Though gas
publicly from the cores of earlier exploration wells. transportation infrastructure is well developed, gas
North American producers are therefore able to focus markets are constrained by national boundaries and the
on development and production using legacy data. The lack of sufficient interconnection capacity between
availability of sub-surface data is limited in India and regional grids. Land and water access are significant
operators must be prepared to invest in exploration and barriers due to intensive land use and stringent
appraisal activities to identify “sweet spots” before environmental regulations.
moving to the exploitation stage. The experience in Europe over the last two years is
Infrastructure gaps. Many of the U.S. shale gas plays were
developed in locations near to conventional oil and gas
producing areas allowing for the use of existing gas
evacuation infrastructure. In India, the Krishna Godavari
(KG) and Cambay basins contain conventional
production and shale gas plays, but other shale gas
prospects are not close to existing production and
therefore transport to market can become an expensive
proposition. In addition, Indian operators will need to
build the surface infrastructure to transport drilling rigs
and pipe the water necessary in the shale gas exploitation
process.
Land access and local regulations. Shale gas production
in the United States developed in largely sparsely

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DEW Journal November 2010 technology
Shale Gas
a cautionary tale – many major companies have rushed conventional E&P). This operation should be modeled
to build acreage positions in the most prospective basins, more on Flexible Factory than traditional E&P and
but exploration activity is only just beginning to take would involve iterative interaction between sub-
off. Industry insiders do not expect a “shale gas glut” surface delineation, development planning and
even under the most favorable conditions. The consensus operations;
seems to be that it will be another five years before • Investment in shale gas exploration capability to
shale gas begins to have any market impact in Europe. overcome the lack of sub-surface knowledge in India;
• A strong project delivery team with proven track
Indian Shale Gas Business Model record of delivering projects on time to ensure that
Prospective shale gas operators need to develop an infrastructure is in place for the rapid and short gas
independent business model adapted to the specific supply peak of each well;
conditions in India. They also should work with • In-house capability to reduce well and infrastructure
government and the regulators to create a favorable capital expenditure (capex);
regulatory environment. • Continuous innovation to reduce costs.
1. Unique Indian Business Model It is also essential that prospective operators should
The Indian business model should include three key co-opt the state and local governments for help with the
initiatives – (i) convening a consortium; (ii) building a water and land access, potentially in exchange for the
strong organization which can take on the unique infrastructure investment.
challenges associated with shale gas development; and 2. Regulatory Response from Government
(iii) co-opting the local communities. The Indian government continues to seek opportunities
The consortium would ideally comprise a gas to secure the country’s energy supplies and it will need
consumer, technology provider (preferably with shale to address the aforementioned issues with policies that
gas production experience), an infrastructure provider enhance the attractiveness of developing shale gas
and a service provider. Each of these players will bring resources. We would suggest there are four specific
a very specific value to the table: initiatives to address these challenges:
• Gas consumer would off-set the off-take risk and would Firstly, allow the market to set the price of shale
be critical, particularly in a basin with inadequate gas gas and not set caps at uneconomic levels as the shale
evacuation infrastructure; gas break-even price is higher than the cap set for
• Technology provider (or European/U.S. shale gas conventional gas. For instance, in the United States the
operator) will bring technology to assess shale full cost of shale gas is $6.00-6.50 per million British
formations, design wells and also operating thermal units 2 (MMBtu). In India, this is likely to be
experience; higher as the cost of capital is higher for Indian operators
• Service provider would contribute E&P resources and and they would have to invest in infrastructure, which
leading shale gas technology for exploration and is likely to push up their overall investment.
production; Secondly, promote better understanding of Indian
• Infrastructure provider would bring experience of sedimentary basins by:
working with local communities and establishing the • Separating work commitments during exploration and
infrastructure required to develop the basin. development phases and more heavily weighting the
Apart from conventional upstream companies, Indian development phase;
gas consumers, infrastructure developers and service • Focusing the Bid Evaluation Criteria (BEC) on firm
providers should consider taking the lead in forming work commitments as opposed to past shale gas or
consortiums to gain early access to shale gas opportunities. E&P experience;
Gas consumers will secure fuel supplies for their current • Subsidizing exploration for the less explored basins
and future projects. Similarly, infrastructure developers (e.g. Vindhyan) in the first round of shale gas auctions
and service providers can leverage these opportunities to and including the exploration subsidy requirement of
generate future revenue streams. the bidders a Bid Evaluation Criteria for comparing
The operating organization requires five key bids of multiple bidders
capabilities: • Thirdly, enhance the attractiveness of shale gas blocks
• Able to accommodate shorter planning and by:
development cycle for shale gas (compared to • Applying the fixed royalty regime for shale gas blocks

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technology DEW Journal November 2010

Shale Gas
as opposed to the Production Sharing Contracts; operators should begin to position themselves to bring
• Bundling more riskier blocks with the more shale gas to reality. dewjournal.com
prospective ones;
• Providing tax incentives to partially off-set the higher about the author
and prolonged capex with well drilling – either by
treating capex as operating expense or by allowing Samir Verma is a Senior Manager with
accelerated depreciation similar to renewable and gas- Schlumberger Business Consulting in
based co-generation plants. Asia. He has more than a decade of
Finally, the government could under-write the experience in Energy, Chemicals &
development of gas evacuation infrastructure to bring Mining in Asia, Africa & Europe.
gas to market as individual gas operators may lack the Prior to joining Schlumberger Business
scale to establish their own pipeline infrastructure. Consulting, Samir worked for 10 years with McKinsey
India is in competition with Europe, China, & Company, in several consulting roles, primarily in
Australia and even the Middle East for risk capital, India but also in SE Asia, the UK & South Africa
technology and management in unconventional gas. Over the last 10 years, he has worked across Oil &
The government and regulators cannot enhance the Gas, Power and Chemicals.
sub-surface endowment, but can adopt the fiscal and Samir holds a B. Tech in Chemical Engineering
regulatory terms to increase the attractiveness of the from Indian Institute of Technology, Delhi (IIT Delhi)
Indian sector. In the same vein, the price for shale gas and an MBA from Indian Institute of Management
should be determined by the market players & not Bangalore (IIM Bangalore).
fixed by the government of India. Ideally, the shale
gas price should be linked to and at a discount to that Shubha Shanthamurthy is a Manager
of liquefied natural gas (LNG) imports, which shale with Schlumberger Business Consulting,
gas would eventually displace. This free float of shale based in London. Shubha has over 15
gas price could be critical to the success of shale gas in years of experience across the energy
India. industry in several countries with both
We believe that shale gas could be an attractive corporate and consulting firms. Her
opp ortunity for India. It could supply India’s growing primary focus is strategy development &
need for energy and act as a catalyst for the more eco- implementation and mergers, acquisitions & disposals.
friendly development of the country’s energy value She holds an MBA from the University of Chicago, and a
chain. If India were to produce domestic gas at less B.Tech in Electronics and Communications Engineering.
than $10 per MMBtu, it could find a very large potential Her experience includes: Shale gas strategy for several
market in the power, automotive and industrial sectors. clients in Europe, Corporate strategy, M&A and business
By substituting coal and liquid fuels from these key planning for an integrated gas major in the UK, where
sectors, shale gas holds the potential to help India she led strategy projects for both upstream and
achieve a less carbon-intensive growth and also downstream business ventures in the USA, Middle East,
enhance energy security. Indian regulators should Europe, Kazakhstan and Global LNG. She also worked
create a conducive environment to nurture this nascent on acquisitions and disposals of upstream and
yet high-potential fuel source and prospective downstream assets.

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