Shale gas: The new kid on the energy mix block

While we have made good progress with CBM, shale gas presents an opportunity we cannot afford to neglect when looking at a viable option for our energy sufficiency. The government will soon come out with a policy on what is acclaimed as the newfound energy saviour. Amitabh Kumar provides pointers to policymakers and practitioners.

Natural gas production from hydrocarbon rich shale formations, known as “shale gas,” is one of the most rapidly expanding trends in onshore domestic oil and gas exploration and production today.

Based on advances in horizontal drilling and hydraulic fracturing technologies, shale gas has transformed the United States from a growing importer of Liquefied Natural Gas (LNG) to self-sufficiency in natural gas, with even the possibility of export.

With an amazing success over the last decade, increasing its share of shale gas from 2 per cent to 17 per cent of total natural gas production between 2000 and 2010 (Fig 1), the US has not only addressed its energy security concerns but also revolutionised this unconventional hydrocarbon for other countries to emulate. While some environmental concerns
do remain for shale gas to become a sustainable option, it is “simply the most significant energy innovation so far this century”, as Daniel Yergin, Chairman, IHS CERA, says.

As India looks to develop its own energy security by reducing dependence on foreign oil and gas (with the increasing supply and price volatility associated with imports) it should make all efforts towards sustainable development of its unconventional hydrocarbon resources.

The energy landscape in India is set to change

1. It is evident from the past few years that India is on a high growth trajectory with GDP expanding at 8-9 per cent per annum. Sustaining this growth will require huge energy supply from both domestic resources and imports. The demand for India's primary energy (including oil, natural gas, coal, nuclear energy and hydro-electric; coal, oil and natural gas remain the major energy sources in the primary energy mix for the period) in 2011-12 at 496 million tonne oil equivalent (mmtoe) is expected to grow about three fold at a CAGR of six per cent, to 1,651 mmtoe by 2031-32, as against projected domestic supply of 434 mmtoe. The demand-supply gap over this period, at a CAGR of 11 per cent reaches 1,217 mmtoe in 2031-32. This is almost 7.5 times the 163 mmtoe DD-SS Gap in 2011-12 (Fig 2a). If we look at the statistics for natural gas (Fig 2b) and crude oil (Fig 2c), a similar picture emerges – domestic supply is not able to meet growing demand.

With a growing dependence on imports (India currently imports more than 80 per cent of its crude oil requirement and 20 per cent of its natural gas requirement, mainly from the Middle East and African countries), geo-political issues in the Gulf and African countries and oil price volatility in the world oil markets pose major challenges to India's energy security and sufficiency. Hence, there is a clear case for developing our domestic resources–conventional and unconventional for energy sufficiency. Given our limited choices, developing shale gas into a sustainable alternative is a challenge we cannot ignore.

Developing Shale Gas in India

In order to develop shale gas as a viable option for India's energy self-sufficiency the following issues need to be addressed:

1. Experience with technologies for shale gas extraction i.e. horizontal drilling and hydraulic fracturing
2. A favourable and investor-friendly environment for shale gas development, like policy support from the government and other such factors
3. Environmental and water management aspects of shale gas development.

How is Shale Gas Produced?

Two major drilling techniques are used to produce shale gas. Horizontal drilling is used to provide greater access to the gas trapped deep in the shale formation. First, a vertical well is drilled to the targeted shale formation. At the desired depth,
the drill bit is turned to bore a well that stretches through the reservoir horizontally, exposing the well to more of the producing shale.

Hydraulic fracturing (commonly called “fracking” or “hydrofracking”) is a technique in which water, chemicals, and sand are pumped into the well to unlock the hydrocarbons trapped in shale formations by opening s (fractures) in the rock and allowing natural gas to flow from the shale into the well. When used in conjunction with horizontal drilling, hydraulic fracturing enables gas producers to extract shale gas at reasonable cost. Without these techniques, natural gas does not flow to the well, and commercial quantities cannot be produced from shale. (Exhibit 1)

Hence a key element in the emergence of shale gas production has been the refinement of cost-effective horizontal drilling and hydraulic fracturing technologies. While these technologies are well established in the US with a proven track record through production of 226 million standard cubic metres per day (mmscmd) of shale gas in 2009, in the Indian context they are yet to be proven. To absorb these techniques, Indian oil and gas companies have taken certain initiatives to make shale gas into a
viable option.

ONGC has commissioned global technology major Schlumberger to carry out pilot projects in the Damodar basin. The area is chosen because ONGC already has Coal Bed Methane (CBM) operations there, the shale is shallow and water is abundant for hydraulic fracturing. The project entails drilling two wells in the West Bengal part of the basin and two wells in the Jharkhand part of the basin, the results of which will help establish the reserve estimate and its commerciality.

In recent months, a number of Indian oil and gas companies have attempted to acquire shale gas assets abroad, particularly in North America. These include OIL, IOCL, GAIL, BPCL and others which indicates their keenness to better understand and absorb the techniques for shale gas extraction in collaboration with experienced players. Reliance Industries Limited (RIL) has taken the lead and acquired interests in three shale gas developments in the US. In 2010, RIL acquired 40 per cent stake in Atlas Energy's Marcellus acreage, 45 per cent stake in Pioneer Natural Resources Eagleford Shale core acreage and a 60 per cent stake in Carizzo Oil and gas Marcellus Shale acreage. Participation in the development of shale plays in the US will give RIL experience in shale gas development and extraction.

With these initiatives, Indian oil and gas companies will be better placed to take advantage of shale gas acreages when offered in India by end 2011. Besides, oilfield service companies like Halliburton and Schlumberger also offer these technologies for shale gas extraction.

Favourable environment

Starting at the top, the Ministry of Petroleum & Natural Gas is actively pursuing the shale gas agenda. The Government of India (GoI) signed a MoU with the US Department of State in November 2010 for cooperation in the following areas:

• Shale gas resource assessment in India
• Technical studies to commence shale gas exploration in India
• Training of Indian personnel

The Directorate General of Hydrocarbons (DGH) is also preparing for the auction of shale blocks towards the end of 2011. As the implementation body for the shale gas MoU signed with the US, the DGH is well positioned to complete technical studies for identifying prospective basins/areas and estimation of shale gas resources in the country, in time for the auction shale gas blocks.

Shale gas policy formulation is well underway and expected to be complete by mid-2011. Some considerations that DGH could take into account when formulating policy are shown in Exhibit 2. A dialogue with key stakeholders will also help to identify other relevant issues for developing a favorable environment.

Environmental aspects of shale gas development

The phenomenal growth of shale gas production in North America in recent years has resulted in the emergence of pressing environmental and water management challenges. The amount of water needed to drill and fracture a horizontal shale gas well generally ranges from about 7.5 million to 15 million litre, depending on formation characteristics. With potentially hundreds of wells to be drilled each year as development proceeds, the water demands can be significant, posing challenges for water sourcing, storage, transport, treatment and disposal that could stand in the way of progress.

Sourcing and ecologically disposing of large quantities of water used in hydraulic fracturing is at the forefront of these challenges and these issues are of increasing concern to stakeholders at every level, including operators, regulators and the public. Hence, water – both its use in hydraulic fracturing and the disposal and treatment of produced water – has emerged as the top environmental issue.

In developing a viable and sustainable option to meet India's energy sufficiency we need to consider the water management challenge very carefully. Environmental policy and regulation in this respect has to be of the highest standard. The US Environmental Protection Agency (EPA), at the direction of the US congress, is in the process of commissioning a study to understand the environmental impact of water used in hydraulic fracturing, from acquisition of water, through the mixing of chemicals and actual fracturing, to the post-fracturing stage, including the management of flowback and produced or used water and its ultimate treatment and disposal (Exhibit 3)

Initial research results and study findings are expected to be made public by the end of 2012, with the goal of an additional report following further research in 2014. While HSE (Health Safety and Environment) is at the core of oil and gas industry operations, for a sustainable solution nevertheless, India should also enter into dialogue with the US EPA for effective regulation to minimise the environmental impact of shale gas extraction.

Conclusion

Those following developments in the shale gas industry know that it can bring about a change in the energy mix by, increasing the share of the cleanest burning fossil fuel – natural gas. The Indian government and industry need to work together to develop a sustainable solution to meet our growing energy requirements.

The author is Senior Manager, Energy & Resources, Deloitte Touche Tohmatsu India Private Limited.