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Monday, October 3, 2011
Today, most financial newspapers have reported on state-owned GAIL acquiring a 20 percent stake in the US-based Carrizo Oil and Gas’ Eagle Ford shale acreage. The deal involves an upfront cash payment of $64 million to Carrizo, with the overall investment valued at around $300 million over the next five years.
The acquisition is a clear attempt to gain expertise in an energy segment that might soon become very significant for India over the next few years. It marks GAIL’s first shale gas asset acquisition and follows billion-dollar-plus purchases by Reliance Industries to gain similar energy assets abroad as well. So, why are companies interested in acquiring shale gas assets? Here’s a quick primer on this unconventional energy source and why it is becoming important for India’s energy companies.
What is shale gas?
Shale gas refers to natural gas that is trapped within shale formations. Shale is a fine-grained sedimentary rock containing an organic material called kerogen, which, when distilled, can produce oil and gas.
Shale gas is often considered an unconventional source because it is found in difficult-to-produce reservoirs, which require special completion, stimulation and/or production techniques to achieve economic production.
Is it a new source of natural gas?
Not really. The presence of shale gas has always been known, but extraction was not vigorously pursued because of high costs. But in recent years, some medium-sized companies figured out smarter ways of drilling. As technology improved, the recoverable reserves were rapidly upgraded. The technology used to extract shale gas is primarilyhydraulic fracturing (or fracking) – bombarding rocks with millions of litres of chemically treated water, which releases the gas.
Does India have shale gas reserves? Are Indian companies tapping these reserves?
While there are no official estimates of shale gas reserves in India, according to oilfield services provider Schlumberger, the country has shale gas reserves of between 300 and 2,100 trillion cubic feet (tcf). Shale formations have been observed in the Damodar basin, Jharkhand and West Bengal.
ONGC is among the state-run companies in the country studying these formations. Last year, with drilling and fracking assistance from the US-based Schlumberger, the company successfully tapped the shale beneath the Damodar basin in West Bengal. It also said it was encouraged to explore shale possibilities in the Cambay, Krishna Godavari, Caurvery and Assam-Arakan basins.
Currently, private companies are barred from exploring for shale gas until an official policy is announced and implemented.
Companies like GAIL and Reliance hope to acquire the skill sets for shale gas exploitation before the country throws open its shale gas assets for bidding in the next few years. It has assumed even more importance because current production from the Krishna Godavari basin’s D6 field – India’s largest natural gas field – has been far below expectations. If the shale gas reserves prove viable, it could be a game-changer for India’s gas industry, which currently has to rely on imports to meet increasing demand.
What kind of demand does India have for natural gas?
India’s natural gas demand is expected to nearly double to 320 million standard cubic metres per day by 2015, according to a report by global consultancy firm McKinsey last year. To manage this growth, India’s natural gas industry will require investments of around $40 billion to $50 billion across the value chain, the report said. Natural gas can be used for fuel, fertilisers and cooking.
How important is the shale gas industry to the energy industry?
Around 32,500 trillion cubic ft (tcf) of shale gas reserves have been identified globally. The US is the leading producer of shale gas, with the fuel accounting for 17 percent of its domestic gas production.
The exploitation of shale gas has revolutionised American energy markets, helping the US in 2009 to overtake Russia as the world’s largest gas producer. Shale now accounts for about 20 percent of US gas production and total output is expected to keep growing, although a recent estimate suggested reserves in one basin could be far lower than previously thought.
Earlier, this month, news reports have talked about an area in northwest England that might contain 200 trillion cubic feet of shale gas, which puts it in the same league as some of the vast shale-gas plays that have transformed the US energy industry. That will certainly give further momentum to the global natural gas industry.
Are there any concerns about shale gas?
The top concerns about shale gas are environmental. While natural gas is cleaner than fossil fuels, the requirement of vast quantities of water shale in gas drilling has sparked considerable opposition from environmental activists, especially in Europe. Indeed, the controversial fracking technique is banned in France and in several American states.
Fracking requires large amounts of water, which sharply reduces the availability of water for other uses. Also, these processes generate large amounts of wastewater containing dissolved chemicals and other contaminants that require treatment before disposal or reuse. That makes wastewater treatment and disposal an important and challenging issue.