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Infrastructure and liberal regulatory regime key to India’s shale gas potential, says EY report

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NEW DELHI, 30 JULY 2013 – India needs to build strong service and infrastructure capabilities, along with a favorable regulatory regime, that while addressing environmental and social concerns, can promote exploration and production activities in its shale gas industry, says ‘Shale gas – global experience and key learning’, a report from EY, released at the International Congress on Shale Exploration India 2013 in New Delhi.

The EY report highlights that to replicate the North American shale gas revolution and fully exploit its shale gas potential, India will need to address several factors that have helped the US achieve success in its shale gas-related initiatives. These include industry-friendly regulations, a favorable pricing regime, a developed onshore oilfield services (OFS) sector, an extensive gas- distribution network and market-driven gas pricing. All countries, outside North America, including India, will need time to develop these capabilities.

The report makes key observations as mentioned below that would be imperative to developing the shale gas industry in India.

Fiscal steps to promote shale gas

The EY report highlights that taking cues from the US, several countries have already begun to take steps to attract investment in their domestic shale gas resources. They are offering financial incentives, including subsidies and reduction in royalty rates. Some countries (such as the UK) are developing shale gas-specific policies to provide regulatory certainty to investors. Over the past one year, China, India and Argentina have raised their natural gas prices to provide an incentive to oil and gas producers to explore and develop gas blocks.

Dilip Khanna, Partner, Oil & Gas, Ernst & Young LLP says,“The recent pricing mechanism for natural gas, approved by the Cabinet Committee on Economic Affairs (CCEA), is expected to incentivize exploration and production (E&P) players and attract investments in the Indian upstream sector in general, and shale gas in particular.”

The report highlights as per the Indian Government’s draft policy on exploration and production of shale oil and gas in the country, initial permission for exploration of shale resources on existing acreage will be restricted to NOCs. The policy also proposes several financial incentives for NOCs, including Income tax and customs exemption, along with reduced royalty to be paid on shale gas. The Ministry plans to formulate a separate policy for private and foreign companies at a later date.

“The Government will have to ensure that the shale gas policy, expected to be released this fiscal year, provides adequate incentives and a level playing field to state-owned, domestic private and foreign companies. This remains a crucial aspect to unlocking the potential of shale gas in India,” says Dilip Khanna, Partner, Oil & Gas, Ernst & Young LLP.

Leveraging technical capabilities in partnership with foreign companies

Domestic state-owned and private companies are partnering with foreign companies and are also acquiring stakes in foreign shale assets. For instance, ONGC has signed an agreement with ConocoPhillips for cooperation in exploration and development of domestic shale gas resources. OIL and IOCL have jointly acquired a 30% stake in Carrizo’s liquid-rich shale assets in the Niobrara basin in the US.

Lack of technological know-how, and inadequate capacity and suitable equipment in the OFS sector are some of the bottlenecks impeding the development of India’s unconventional resource potential. OFS companies are looking to export techniques, used successfully in North America, to international markets. India could tap this opportunity and encourage the participation of such companies in the country.

Natural gas pipeline infrastructure

The EY report also stresses the need for India to expand its natural gas pipeline infrastructure. Presently, around 11,500 km is covered by natural gas pipelines across the country, with another 12,650 km of pipeline infrastructure being under various stages of implementation. Timely execution of these projects will be critical for developing shale resources in the country. Furthermore, the Government will have to create a favorable policy that addresses the concerns of landowners, and oil and gas companies, in view of land acquisition being expected to be a vital issue in India.

Widely dispersed shale gas reserves have pushed to the forefront its strong potential to emerge as a major alternative source of energy worldwide. India needs to tap this energy source, since its natural gas market continues to see a deficit, with demand far exceeding supply. In FY13, natural gas consumption in India is expected to stand at 104.4 bcm, as compared to its production of 40.7 bcm, which has increased dependence on LNG imports. The Indian Government has taken steps to address this supply-demand deficit. These include its initiative to increase wellhead gas prices, effective April 2014, which is likely to incentivize companies to increase their gas production and also benefit India’s shale gas industry.

The U.S. Energy Information Administration (EIA) has revised its estimates upwards on technically recoverable shale gas resources in India, which now stand at 96 tcf, up from its previous estimate of 63 tcf. This revision will help the Government of India attract investors to its first shale gas bidding round, which is slated for the end of 2013.

The EY report observes that two-third of technically recoverable shale gas resources are concentrated in seven countries — China, Argentina, Algeria, the US, Canada, Mexico and Australia. China has the largest technically recoverable shale gas resources (1,115 tcf), followed by Argentina (802 tcf), Algeria (707 tcf) and the US (665 tcf). In terms of geography, North America accounts for a 24% share, South America for 20%, Africa and Asia for 19% each, and Europe and Australia for another 12% and 6%, respectively, of global technically recoverable shale gas resources.

In the US, the shale gas revolution has been led by mid-sized independent E&P and technology companies. The Government of India should ensure that adequate incentives and a level playing field are made available to domestic private and foreign companies to encourage investments in this important hydrocarbon resource.

 

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