From rocks to riches

From rocks to riches

Above the ground problems could complicate India’s efforts to replicate the US’s shale gas boom.

Is it time to throw some cold water on the so-called shale revolution? The answer depends on who is holding the canister of water. If it is an American or Chinese,perhaps not. But if it is a European or an Indian,perhaps yes. Why?

The shale revolution has been the focus of interest of the petroleum industry for several years,and for good reason. It has opened up an entirely new frontier of hydrocarbon resources and it has substantially relieved the US of the burden of oil and gas imports. Many hydrocarbon-producing countries are now looking to replicate the US’s success. The question is,will they succeed? The answer will depend on how effectively they manage the “above the ground” impediments. In India,the latter could be the deal-breaker.

The shale revolution refers to the extraordinary success America has had in unlocking oil and gas molecules from shale rock. The fact that hydrocarbons existed between the pores of these rocks has been known for long,but it was not until 1998,when George Mitchell,the chairman of a small independent oil and gas company based out of Houston,drilled the first commercially viable horizontal well in the Texas Barnett shale basin,did it become possible to monetise them. His success enabled companies to fracture the shale rock by bombarding it with a combination of water,chemicals and salt under extreme pressure (hydraulic fracturing or “fracking”) and then producing the released molecules through a network of horizontal wells splayed across the basin. The big players invested billions and the term “shale gale” entered the oil industry lexicon. Gas production in the US has surged over the past five years — so much so that companies that had created gas import re-gassification facilities have now applied to convert them into gas liquefaction export plants. President Barack Obama is currently sitting on more than a dozen such applications. The price of US gas has crashed to less than half the price of gas in Europe and a quarter of the price in the Asia-Pacific region. And US oil production has increased at a rate faster than any country in the world. There is now talk that America might achieve self-sufficiency in oil,too.

These extraordinary results have catalysed worldwide interest in “shale gas” and “tight oil” (liquids from shale). Other governments have asked their technocrats essentially three questions. Does the country have shale rock? If so,what might be the “unconventional” hydrocarbon potential? And what must be done to develop and monetise this potential?

The response to the first two questions has,so far,been almost uniformly encouraging. Most countries have established that they do have shale,and that non-US reserves are potentially huge. China,for instance,is expected to have larger reserves than the US; the UK is hoping to replace declining North Sea output with shale production,and India has been encouraged by initial studies. The US Geological Survey and the International Energy Agency studied seven of India’s 26 sedimentary basins. Their conclusion was that four of these basins contained shale and “risked reserves” of between 65 to 100 trillion cubic feet of technically recoverable shale gas. The answer to the third question,however,has been more cautious. There is now mounting concern about “above the ground” impediments.

For a start,many countries are worried about environmental consequences. For instance,France has banned hydraulic fracturing because it fears that the chemicals will leach into the soil and/ or contaminate ground water. It is also afraid that methane might leak into the atmosphere. Methane is an order of magnitude stronger greenhouse gas than carbon dioxide. Then there are issues related to population density,acquisition of land,availability of water,management of the supply chain and the diverse and often conflicting interests of multiple stakeholders.

America did not have to contend with these issues. It is not densely populated and the bulk of the drilling has taken place in scarcely populated areas. It is not short of water. The companies have had little or no difficulty in negotiating rights to expansive and contiguous acreage because the average size of landholdings is large and the landlords have an incentive to encourage drilling because they own the sub-surface minerals. The oil service sector is well developed and capable of supporting an intensive assembly line drilling programme. The approval process is streamlined,transparent and time-bound,and the stakeholders are not divided and misaligned. Most have a common interest in exploration and production.

The situation in other countries,however,is different. For example,India is densely populated,its land holdings are fragmented,and the sub-surface mineral rights do not belong to the land owner (the Supreme Court has recently passed an order that might give landowners such rights,but as of the writing the situation is not clear). It is fast reaching the threshold of a water crisis. There is no indigenous oil service industry and no institutional mechanisms by which to bring the divergent and multiple stakeholders (the various Central government ministries,their state government counterparts,landowners,suppliers and civil society) around a table to hammer out a common approach. Many other countries face a variant of these “above the ground” hurdles. Some,like China,may be able to overcome them through government fiat. Most will find it challenging and time-consuming. That is why it is good to keep a canister of water ready at hand. Decision-makers who allow their rhetorical reach to exceed their substantive grasp and fail to appreciate that the shale revolution will remain an American phenomena until and unless these hurdles are crossed,will need to be periodically doused.


The writer is the chairman of Brookings India and senior fellow,Brookings Institution