Shale gas, not Iran pipeline, our energy hope

External affairs minister S M Krishna visited Tehran in mid-May and said India was still interested in the proposed Iran-Pakistan-India (IPI) gas pipeline, but expressed reservations on security grounds. However, there is now a more important economic reason to oppose the pipeline.

The IPI gas price has become ridiculously high in the light of new technology for extracting gas from shale, a common sedimentary rock found across the world. The IPI project never made sense from a security viewpoint. It now makes no sense from an economic viewpoint.The US has pioneered shale gas technology. This has created a glut, sending gas prices plummeting from $13/mmbtu (million British thermal units) four years ago to just $4/mmbtu today, even as the price of oil has more than doubled. By contrast, the IPI formula links the gas price to oil prices. This implies that India will have to pay $10/mmbtu at today’s oil price of $70/barrel, and a whopping $20/mmbtu for gas if oil returns to its 2008 peak of $150/barrel. India cannot possibly accept such a price formula when shale gas technology has sent prices plummeting.

It must insist that the Gulf countries abandon the old price link between gas and oil, and accept the new low prices established at trading hubs like Henry Hub in Louisiana. Iran, Qatar and other Gulf countries are aghast at the emergence of shale gas as a rival, and want to stick to the gas-oil price link. India must refuse to do any gas deals with them until they drop the link.

Indeed, India may need no gas deals at all with Gulf countries for a long time. Gas from the Krishna-Godavari offshore basin is going to flow in huge quantities in the next few years, making India self-sufficient. New gas deposits are constantly being found offshore.

Besides, India also has massive shale deposits, and should give priority to exploiting these over sinking billions into a highly dubious pipeline through Pakistan.  Reliance Industries Ltd has been the first to grasp the new opportunity. It has just bought a 40% stake in the operations of a US company, Atlas Energy, in the Marcellus Shale, a huge deposit extending from New York to West Virginia. Reliance is looking for maybe two more shale gas acquisitions in the US, and Essar Oil will probably follow suit. The ONGC, as always, is slow off the mark, but will lumber into this game soon.

Gaining experience and technology in the US can help Indian companies launch a large shale gas programme in India.

Shale has long been known to contain gas, but this does not flow from a normal well since shale is not porous.  The new technology cracks open shale with sand and water under high pressure, opening up the formation and allowing gas to flow. The share of shale gas in the US gas production has shot up from zero to 8% in the last decade. One single deposit, the Barnett Shale in Texas, produces 1.1 trillion cubic feet per year, and other deposits (Bakken, Haynesville) could be as productive.

Four years ago, US companies thought a gas price of at least $6/mmbtu was needed to make the extraction of shale gas viable.  But as technology has improved, shale gas has become viable in some cases at just $3/mmbtu. Indeed, Anadarko Petroleum thinks it can produce gas from the Marcellus shale at just $2.50/mmbtu.  This is well below the $4.20/mmbtu set by the Indian government for offshore gas.

India has huge shale deposits spread across the Gangetic plain, Assam, Punjab, Rajasthan, Gujarat and southern coastal areas.  All these are potentially gas bearing. The government has no policy framework for shale gas, and needs to devise one quickly so that exploration can begin. Seismic surveys on a massive scale are needed to produce basic data. If these data are then made available to bidders, prospective shale gas deposits can be put on the bidding block.

In the case of offshore gas, the government has given itself complete powers of price control. This has kept foreign companies away from the last round of bidding.  For shale gas, blocks must be auctioned with a clear provision that there will be no price control.

Europe is frenziedly getting into shale gas, hoping to reap a bonanza as in the US, and also free itself from dependence on Russian gas.  India needs to provide terms for shale gas blocks that are at least as good as European terms. That alone will attract global firms with the necessary technology.

What do you think?