Shale Gas: The Indian Perspective

Submitted To: Dr. Sanjay Kar

By

Puneet Bhardwaj
MBA 2012-14

Contents

1.) Overview of shale gas 2.) How shale gas has changed the energy market dynamics 3.) Technology that led to economical extraction of Shale gas 4.) Learning from the US story 5.) India's Shale gas potential 6.) Possible dominant players in the Indian Market 7.) Observed momentum for Shale gas extraction in India 8.) Challenges Ahead

Rajiv Gandhi Institute of Petroleum Technology, MBA Department

Summary

The study discusses about the impacts of the economic extraction of shale gas in the past few years & how the improvement of technology for shale gas extraction has led to a revolution in the energy sector. Main section of this study discusses how shale gas exploration has become imperative for India. Also, how India is proceeding towards harnessing the available shale gas resources. Study throws light over the new draft shale gas policy introduced by Directorate General of Hydrocarbons for beginning the exploration of shale gas in India from the year 2013 onwards. The major issues in the exploration & production of shale gas in India are discussed in detail. Along with other issues this study also discusses the environmental implication of shale gas extraction. The study is aimed to discuss the holistic potential of shale gas in India.

Rajiv Gandhi Institute of Petroleum Technology, MBA Department

Overview of shale gas

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 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. All unconventional deposits have in common that the gas or oil content per rock volume is small compared to conventional fields, that they are dispersed over a large area of tens of thousands of square kilometers and that the permeability is very low. Therefore, special methods are necessary to extract that oil or gas. In addition, due to the low hydrocarbon content of the source rocks, the extraction per well is much smaller than in conventional fields, making their economic production much more challenging. It is not the gas itself that is unconventional, but the extraction methods are. These methods need sophisticated technologies, lots of water and the injection of additives, which may be harmful to the environment. 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.
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Things improved 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 decade the drilling technology has substantially improved and horizontal drilling is possible today. Horizontal drilling enables the well to cover a shale zone for hundreds of meters (both horizontally & vertically), 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 in a large way. Although, such technological developments have changed the energy market in a large way there are unavoidable side effects concerning water use, environmental risks etc. For instance, hydraulic fracturing in tight gas formations typically needs several hundred thousand liters of water per well for each fracturing process mixed with propellants and chemicals while hydraulic fracturing in shale gas formations consumes several million liters of water per well.

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How shale gas has changed the energy market dynamics Shale gas is now a proven "game changer", after high-profile acquisitions in US shale gas plays. Two key trends in the last decade have driven this: During the decade 2000-10, the breakeven cost of shale gas production has declined fromUS$8-12/mmbtu to US$2-7/mmbtu, led by technological breakthrough. This has enabled shale gas to compete with conventionally extracted natural gas. In the year 2000, shale gas accounted for less than 2% of the total gas production in the US. By 2010 end, this ratio had increased to ~20%, and is increasing further. [Source: IEA] Shale gas deals in the US worth ~US$70b entered into by global energy majors (ExxonMobil, RIL, BHP, Chevron, Schlumberger) in the last yearand-a-half validate the shale gas story. As per a 2011 article named The Arithmetic of Shale Gas by Forbes magazine consider the following specifics: Consider that back in 2008, before the shale boom really took off, the nominal price of natural gas (that is, the price at the Henry Hub in Louisiana) averaged $7.97 per mcf. In 2011, the price averaged $3.95 per mcf. Multiply that price drop of $4.02 per mcf by the 25.6 trillion cubic feet the country consumed in 2008 and you find that thanks to the shale boom, America is paying $103 billion a year less for natural gas. Had there been no shale gas boom, the United States would instead have been forced to do what the experts expected five years ago: import massive quantities of gas, in the form of LNG from countries like Qatar, Australia, even Russia. Import-dependent nations like Japan and Korea pay upwards of $14 per mcf for LNG more than triple U.S. prices. If the U.S. had to supplement domestic supplies with imports, the extra costs could have easily added $50 billion a year to the national natural gas bill.

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Shale gas has driven the rise in gas production in the US over the last five years. Between years 2000-05, shale gas accounted for just 2-4% of the total gas production in the US. By 2010, this ratio had increased to ~20%, and is increasing further.

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Technology that led to economical extraction of Shale gas The presence of shale gas has been long known. Commercially viable exploitation used to be a challenge previous to last decade, since extraction was difficult and the gas deposit was spread over a larger area. Technological advancements on horizontal drilling and hydraulic fracturing have made it possible to exploit these unconventional gas deposits. Breakeven production costs (that differ from basin to basin) are now reported to be under US$4/mmbtu. Much technological progress is still being made due to which the cost of extraction may decline further. Compared to vertical wells, the horizontal wells can cover 3-4 times more area. Moreover, there has been considerable improvement in gas yield per well by fracturing, leading to more gas flow paths. Once a well has been drilled and cased (completed), explosive charges fired by an electric current perforate holes along selected intervals of the well within the shale formation from which shale gas is produced. Pumps are used to inject fracturing fluids, consisting of water, sand (proppant) and chemicals, under high pressure into the well. The injection pressure generates stresses in the shale that exceed its strength, opening up existing fractures or creating new ones. The fractures extend a few hundred meters into the rock and the newly created fractures are propped open by the sand. Additional fluids are pumped into the well to maintain the pressure in the well so that fracture development can continue and proppant can be carried deeper into the formation (API 2009).

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Learning from the US story

US have been the pioneer of developing the technology to economically harness. Mitchell Energy, now part of Devon Energy, developed the hydraulic fracturing technique known as "slickwater fracturing" that made the shale gas extraction economical. Horizontal slickwater fracking was first used in 1998 in the Barnett Shale in Texas. American companies have taken the lead in developing newly accessible resources, prompting government officials, energy analysts and companies to hail domestic shale gas development as a game-changer, the most positive event in the U.S. energy outlook in 50 years, and the Dawn of a New Gas Era. EIA is projecting a 25 percent increase in domestic natural gas production between 2009 and 2035 to 26.3 trillion cubic feet, with shale gas driving this dramatic growth. Shale gass portion of U.S. natural gas production has climbed from less than 2 percent in 2001 to nearly 30 percent today, and EIA projects it will reach 49 percent by 2035. Al-together, energy analysts now estimate there is enough natural gas to supply the country for at least 100 years at current rates of consumption. The transformation is such that companies now are eyeing liquid natural gas import terminals on the Gulf Coast for conversion into export terminals. Energy Information Association (EIA) in its Annual Energy Outlook 2012 early release overview has estimated 482 trillion cubic feet (tcf) of unproved technically recoverable onshore shale gas resources in the lower 48 states. Four of the largest include: 114 trillion cubic feet (25 percent) in the Marcellus Shale, more than a mile beneath portions of Pennsylvania, New York, Ohio and West Virginia. Range Resources began producing the first gas from the Marcellus shale in 2005. 75 tcf (17 percent) in the Haynesville Shale, more than two miles below the surface of northwestern Louisiana, southwestern Arkansas and eastern Texas. Chesapeake Energy and Encana were among the first to begin drilling in this play in the mid-2000s.
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 43 tcf (10 percent) in the Barnett Shale, about one and a half miles under north Texas, including the Dallas/Fort Worth area. Mitchell Energy (now Devon Energy) first paired large-scale horizontal drilling with fracking here in 1995, and the play took off in 2003. 32 tcf (7 percent) in the Fayetteville Shale, which varies in depth from 1,500 feet to 6,500 feet under north central Arkansas. Southwestern Energy pioneered development of this shale in 2003. Liquids-rich shale plays include the Eagle Ford in south Texas and the newly discovered Utica in Pennsylvania and Ohio that hold gas, gas liquids and oil. Oil shale plays include the Bakken in North Dakota and Niobrara in Colorado.

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India's Shale gas potential

Around 2009, ONGC initiated shale gas exploration in the country. It identified promising shale sequences in well explored basins like Damodar, Cambay, Krishna-Godavari (KG) and Cauvery. The Assam-Arakan basin is also considered to have promising shale gas deposits. ONGC and OIL have started pilot projects in the Damodar and Assam-Arakan basins, respectively. In January 2011, ONGC struck shale gas at a depth of 1700 meters in its RNSG-1 well in Damodar valley Basin, West Bengal which made India first Asian country to discover shale gas. So far government has identified six basins for exploration Cambay, Assam-Arakan, Gondwana, Krishna-Godavari onshore, Cauvery onshore & Indo-Gangetic. Basins in India:

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A recent study (April 2011) by Energy Information Administration (EIA), USA indicates that there is a significant potential for Shale Gas that could play an increasingly important role in global natural gas markets. The Report assessed 48 Shale Gas basins in 32 countries. India is one of the countries covered in this Report along with Canada, Mexico, China, Australia Libya, Brazil etc. This study has assessed risked gas-in-place of 290 TCF with technically recoverable resource of 63 TCF for 4 out of 26 sedimentary basins in India. In view of the advances made by the USA in exploration and recovery of shale oil and gas resources, MoP&NG has entered into and MOU with the United States Geological survey (USGS). In a study conducted by the USGS in 2011-12, technically recoverable resource of 6.1 TCF has been estimated in 3 out of 26 sedimentary basins in India. The study also indicates potential for shale oil in Indian basins. Further, process of identification of potential shale oil/gas resources in 11 other basins has also been initiated.

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Possible dominant players in the Indian Market Among the government owned PSUs, ONGC is advantageously placed to tap into the country's emerging shale gas opportunity. Through its promoter, the Government of India, it stands to gain significantly from the close cooperation between the US and India. ONGC also owns large nomination acreage in shale gas rich regions, e.g. Cambay basin and Assam-Arakan basin. It has already started pilot projects in the shale-rich Damodar region, with encouraging initial results. Among private players, RIL has an edge over other domestic players in acquiring shale gas experience and technology. It has acquired part stakes in three US companies focused on shale plays. RIL is the first Indian company to own a shale gas asset abroad. The company has invested around $2.89 billion in three shale gas assets in the US till date which is capable of producing 26.4 trillion cubic feet (tcf) gas. Given the different shale basins in which the JV companies have assets, RIL's experience is likely to be that much richer. RIL also intends to gain experience as operator of their shale gas assets. This will stand it in good stead for bidding Indian shale auctions and in exploiting any acreage that it wins. RIL's US shale gas experience will help it in outbidding competitors in India's impending shale gas auction. Since the technology is new and the operating rules driven by environmental concerns are still evolving, the DGH is likely to place high weightage on the technical capabilities of participants in shale gas operations. In case of bidding for deepwater blocks, where again similar considerations drive the bid evaluation criteria, the weightage on technical capability is 25% of the total points of 100. The bid evaluation criteria for shale gas could be similar to deepwater blocks. If so, RIL will outshine other competitors in terms of its technical expertise.

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Other Indian oil companies have also started buying stakes in shale gas acreages abroad, both from the prospective of ensuring energy security & getting the technical expertise for GAIL (India) Ltd has acquired a 20 per cent interest in Carrizo's Eagle Ford Shale acreage position in the US through its wholly owned US subsidiary GAIL Global (USA) Inc for $95 million. Moreover, Oil India Ltd and Indian Oil Corp have jointly bought a 30 percent stake in Houston-based Carrizo Oil & Gas's Niobrara shale asset in Colorado for USD 82.5 million.

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Observed momentum for Shale gas extraction in India

In India, the last couple of years have witnessed high-paced activities towards developing the shale gas potential in the country. This increased pace of activities is also timed with decreased expectation of gas production from KG-D6. This is indicative of the belief of the Indian hydrocarbon ecosystem that shale gas could be a viable means of plugging the domestic gas deficit, and plugging it quicker than earlier expectations. This momentum in activities is seen at the government level, as well as among public and private sector companies. Government of India signed an MoU with the US government in November 2010 to obtain technical assistance for characterization and assessment of shale gas resources, policy formulation for shale gas, carrying out of technical studies & training of manpower etc. The Directorate General of Hydrocarbons (DGH), GoI, is actively preparing for the auction of shale blocks from the year 2013. DGH has recently come up with the draft version of shale gas policy for the same. In its latest annual report DGH has mentioned that Areas like Shale Gas exploration and production will be under prime focus in the immediate future. Six basins viz. Cambay, KG onland, Cauvery Onland, Assam Arakan, Ganga valley and Damodar, have been taken up on priority for mapping shale oil / gas prospective areas. As per the draft policy, the identified blocks in these basins will be advertised for international competitive bidding. Participation of the State will not be mandatory. Requisite promotional exercise would be undertaken to apprise the prospective bidders with the proposed fiscal and contractual arrangement. Offer of blocks would be open to different categories of investors, i.e. public / private sector and domestic / foreigners. Up to 100% participation by foreign companies and participation through unincorporated Joint Ventures would be permitted.

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Challenges Ahead

Although, there are huge advantages of harnessing shale gas but there are many key challenges for proper exploration & production of shale gas which need to be addressed upfront for smooth implementation of the shale gas policy in India. An unavoidable impact of shale gas and tight oil extraction is a high land occupation due to drilling pads, parking and maneuvering areas for trucks, equipment, gas processing and transporting facilities as well as access roads. Major possible impacts are air emissions of pollutants, groundwater contamination due to uncontrolled gas or fluid flows due to blowouts or spills, leaking fracturing fluid, and uncontrolled waste water discharge. Fracturing fluids contain hazardous substances, and flow-back in addition contains heavy metals and radioactive materials from the deposit. Experience from the USA shows that many accidents happen, which can be harmful to the environment and to human health. Moreover, limited availability of water for hydraulic fracturing could become a significant constraint on the development of shale gas in some water-stressed areas. Shale gas extraction require excessive water supply which can also reduce the availability of water for use by local communities and in other productive activities, such as agriculture. The treatment and disposal of waste water are critical issues for shale gas production. After being injected into the well, part of the fracturing fluid (which is often almost entirely water) is returned as flow-back in the days and weeks that follow. Flow-back returns (like waste water from drilling) requires secure storage on site, preferably fully contained in stable, weather-proof storage facilities as they do pose a potential threat to the local environment unless handled properly.

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Shale gas production techniques and possible environmental hazards are shown in the following diagram:

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Conclusion

Technological advancements on horizontal drilling and hydraulic fracturing (hydro fraccing) have made it possible to exploit shale gas deposits. Much technological progress is still being made due to which the cost of extraction is likely to decline further. Thus, it can be said that shale gas has a greater role to play in the global energy market in the coming years. India is among one of the countries which has ample amount of recoverable shale gas & with government keen on developing the framework for extraction & production of shale gas, the shale gas story of US can be repeated in India too with a good prospect of turning India from net importer of natural gas to net exporter. Also, Indias oil & gas import bill, an astronomically Rs. 4.65 lakh crores last year, will reduce considerably. But, on the other side of the big picture, lies big issues related to high land occupation, air emissions of pollutants, depletion in water-table because of excessive usage of water in fracturing process, groundwater contamination due to blowouts or spills etc need to be addressed while devising a proper framework for extraction of shale gas.

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References 1.) Shale gas extraction in the UK: a review of hydraulic fracturing. The Royal Society and the Royal Academy of Engineering. Issued: June 2012 DES2597. 2.) World Energy Outlook: Special report International energy agency. 2012. on unconventional gas.

3.) Shale gas in India: Closer to reality. Motilal Oswal Research. 29 March 2011 4.) Draft Shale gas policy. Directorate General of Hydrocarbon. July 2012 5.) Shale gas: Global perspective. KPMG. 2011 6.) Impacts of shale gas and shale oil extraction on the environment and on human health. Policy Department Economic and Scientific Policy, European Union. June 2011 7.) Shale gas outlook: A US perspective. KPMG. 2012 8.) http://www.thehindubusinessline.com/companies/article2496191.ece 9.) http://www.moneycontrol.com/news/business/oil-india-ioc-buy-stakeusshale-assets-for-36825m_765031.html 10.) http://www.forbes.com/sites/christopherhelman/2012/06/22/thearithmetic-of-shale-gas/ 11.) http://www.dghindia.org/NonConventionalEnergy.aspx?tab=2

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