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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Shale Gas
Competition and innovation are
critical. The U.S. shale gas
revolution would not have been
possible without innovation,
such as the adoption of
directional drilling for on-shore
wells, multiple fracturing and
Flexible Factory.
the evacuation infrastructure would impact the
economics but not necessarily enough to result in
cancellation, the impact is more severe for shale gas.
Competition and innovation are critical. The U.S. shale
gas revolution would not have been possible without
innovation, such as the adoption of directional drilling
for on-shore wells, multiple fracturing and Flexible
Factory 1 . The North American shale gas pioneering
companies were largely small and nimble; they learned
quickly from their experiences and reduced costs. India
lacks both the small wildcat exploration firms that
spearheaded shale gas exploitation in the United States,
and the competing oilfield services firms that support
them. This competition in the service sector was vital in
aiding the operators to drive down costs.
Sub-surface understanding is key to field development
and the identification of sweet spots. Oil and gas
exploration has a long and deep history in the United
States, and there is substantial sub-surface data available
publicly from the cores of earlier exploration wells.
North American producers are therefore able to focus
on development and production using legacy data. The
availability of sub-surface data is limited in India and
operators must be prepared to invest in exploration and
appraisal activities to identify “sweet spots” before
moving to the exploitation stage.
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
populated areas. In India, where the population density
is tenfold that of the United States, shale gas production
may face local opposition because of disruption to
communities from drilling activities. There are also
differences in lease agreements: the sub-surface rights
vest with the government in India, while the surface
rights lay with the landowner. Therefore, landowners
in India are unlikely to benefit directly from the
development of shale gas resources. In the United States,
both the surface rights and the mineral rights rest mostly
with landowners, who may sell their rights to
developers.
Deep and liquid gas market. India’s domestic energy
markets are evolving but are nowhere near the
sophistication of North America, where gas is traded on
the physical and futures markets. U.S. companies are
able to sell their gas easily into the system and use the
futures market to support heavy drilling programs that
require constant re-investment.
The European Experience
There are valuable lessons to be learnt from the
development of the shale gas industry in Europe. India
is more aligned to Europe than North America in several
of the factors discussed above. The onshore E&P industry
in Europe is much smaller than that in the United States
and is fragmented by national boundaries. European
shale basins are both more heterogeneous and less
explored when compared to North America. Though gas
transportation infrastructure is well developed, gas
markets are constrained by national boundaries and the
lack of sufficient interconnection capacity between
regional grids. Land and water access are significant
barriers due to intensive land use and stringent
environmental regulations.
The experience in Europe over the last two years is
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DEW Journal November 2010
a cautionary tale – many major companies have rushed
to build acreage positions in the most prospective basins,
but exploration activity is only just beginning to take
off. Industry insiders do not expect a “shale gas glut”
even under the most favorable conditions. The consensus
seems to be that it will be another five years before
shale gas begins to have any market impact in Europe.
Indian Shale Gas Business Model
Prospective shale gas operators need to develop an
independent business model adapted to the specific
conditions in India. They also should work with
government and the regulators to create a favorable
regulatory environment.
1. Unique Indian Business Model
The Indian business model should include three key
initiatives – (i) convening a consortium; (ii) building a
strong organization which can take on the unique
challenges associated with shale gas development; and
(iii) co-opting the local communities.
The consortium would ideally comprise a gas
consumer, technology provider (preferably with shale
gas production experience), an infrastructure provider
and a service provider. Each of these players will bring
a very specific value to the table:
• Gas consumer would off-set the off-take risk and would
be critical, particularly in a basin with inadequate gas
evacuation infrastructure;
• Technology provider (or European/U.S. shale gas
operator) will bring technology to assess shale
formations, design wells and also operating
experience;
• Service provider would contribute E&P resources and
leading shale gas technology for exploration and
production;
• Infrastructure provider would bring experience of
working with local communities and establishing the
infrastructure required to develop the basin.
Apart from conventional upstream companies, Indian
gas consumers, infrastructure developers and service
providers should consider taking the lead in forming
consortiums to gain early access to shale gas opportunities.
Gas consumers will secure fuel supplies for their current
and future projects. Similarly, infrastructure developers
and service providers can leverage these opportunities to
generate future revenue streams.
The operating organization requires five key
capabilities:
• Able to accommodate shorter planning and
development cycle for shale gas (compared to
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technology
Shale Gas
conventional E&P). This operation should be modeled
more on Flexible Factory than traditional E&P and
would involve iterative interaction between sub-
surface delineation, development planning and
operations;
• Investment in shale gas exploration capability to
overcome the lack of sub-surface knowledge in India;
• A strong project delivery team with proven track
record of delivering projects on time to ensure that
infrastructure is in place for the rapid and short gas
supply peak of each well;
• In-house capability to reduce well and infrastructure
capital expenditure (capex);
• Continuous innovation to reduce costs.
It is also essential that prospective operators should
co-opt the state and local governments for help with the
water and land access, potentially in exchange for the
infrastructure investment.
2. Regulatory Response from Government
The Indian government continues to seek opportunities
to secure the country’s energy supplies and it will need
to address the aforementioned issues with policies that
enhance the attractiveness of developing shale gas
resources. We would suggest there are four specific
initiatives to address these challenges:
Firstly, allow the market to set the price of shale
gas and not set caps at uneconomic levels as the shale
gas break-even price is higher than the cap set for
conventional gas. For instance, in the United States the
full cost of shale gas is $6.00-6.50 per million British
thermal units 2 (MMBtu). In India, this is likely to be
higher as the cost of capital is higher for Indian operators
and they would have to invest in infrastructure, which
is likely to push up their overall investment.
Secondly, promote better understanding of Indian
sedimentary basins by:
• Separating work commitments during exploration and
development phases and more heavily weighting the
development phase;
• Focusing the Bid Evaluation Criteria (BEC) on firm
work commitments as opposed to past shale gas or
E&P experience;
• Subsidizing exploration for the less explored basins
(e.g. Vindhyan) in the first round of shale gas auctions
and including the exploration subsidy requirement of
the bidders a Bid Evaluation Criteria for comparing
bids of multiple bidders
• Thirdly, enhance the attractiveness of shale gas blocks
by:
• Applying the fixed royalty regime for shale gas blocks
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Shale Gas
as opposed to the Production Sharing Contracts;
• Bundling more riskier blocks with the more
prospective ones;
• Providing tax incentives to partially off-set the higher
and prolonged capex with well drilling – either by
treating capex as operating expense or by allowing
accelerated depreciation similar to renewable and gas-
based co-generation plants.
Finally, the government could under-write the
development of gas evacuation infrastructure to bring
gas to market as individual gas operators may lack the
scale to establish their own pipeline infrastructure.
India is in competition with Europe, China,
Australia and even the Middle East for risk capital,
technology and management in unconventional gas.
The government and regulators cannot enhance the
sub-surface endowment, but can adopt the fiscal and
regulatory terms to increase the attractiveness of the
Indian sector. In the same vein, the price for shale gas
should be determined by the market players & not
fixed by the government of India. Ideally, the shale
gas price should be linked to and at a discount to that
of liquefied natural gas (LNG) imports, which shale
gas would eventually displace. This free float of shale
gas price could be critical to the success of shale gas in
India.
We believe that shale gas could be an attractive
opp ortunity for India. It could supply India’s growing
need for energy and act as a catalyst for the more eco-
friendly development of the country’s energy value
chain. If India were to produce domestic gas at less
than $10 per MMBtu, it could find a very large potential
market in the power, automotive and industrial sectors.
By substituting coal and liquid fuels from these key
sectors, shale gas holds the potential to help India
achieve a less carbon-intensive growth and also
enhance energy security. Indian regulators should
create a conducive environment to nurture this nascent
yet high-potential fuel source and prospective
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DEW Journal November 2010
operators should begin to position themselves to bring
shale gas to reality. dewjournal.com
about the author
Samir Verma is a Senior Manager with
Schlumberger Business Consulting in
Asia. He has more than a decade of
experience in Energy, Chemicals &
Mining in Asia, Africa & Europe.
Prior to joining Schlumberger Business
Consulting, Samir worked for 10 years with McKinsey
& Company, in several consulting roles, primarily in
India but also in SE Asia, the UK & South Africa
Over the last 10 years, he has worked across Oil &
Gas, Power and Chemicals.
Samir holds a B. Tech in Chemical Engineering
from Indian Institute of Technology, Delhi (IIT Delhi)
and an MBA from Indian Institute of Management
Bangalore (IIM Bangalore).
Shubha Shanthamurthy is a Manager
with Schlumberger Business Consulting,
based in London. Shubha has over 15
years of experience across the energy
industry in several countries with both
corporate and consulting firms. Her
primary focus is strategy development &
implementation and mergers, acquisitions & disposals.
She holds an MBA from the University of Chicago, and a
B.Tech in Electronics and Communications Engineering.
Her experience includes: Shale gas strategy for several
clients in Europe, Corporate strategy, M&A and business
planning for an integrated gas major in the UK, where
she led strategy projects for both upstream and
downstream business ventures in the USA, Middle East,
Europe, Kazakhstan and Global LNG. She also worked
on acquisitions and disposals of upstream and
downstream assets.
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