Shale gas: Could it be a new energy source?

The world economy is recovering, and the price of oil too. It has crossed $70/barrel, and could return to $150/barrel, if the recovery continues. Can India do anything new to meet this energy challenge?

Yes, it can change its exploration policy to harness a new energy source — shale gas. No Indian has paid attention to the dramatic emergence of shale gas in the US, which has produced a gas glut. This has slashed the US price of natural gas by 75% from its peak in mid-2008. India must learn from this.

Shale is a common rock formation across the world. India has huge shale deposits across the Gangetic plain, Assam, Gujarat, Rajasthan, and many coastal areas. Gas has long been found in shale across the world, but its extraction has been viewed as uneconomic because of shale’s low permeability — gas does not flow easily through this rock. So, exploration for oil and gas has traditionally focused on limestone and sandstone, which have high permeability.

However, in the 1990s a new drilling technology emerged. A tight shale deposit could be cracked open by injecting water into wells at high pressure. When the water injection stopped, the cracks closed again. But then engineers hit on the idea of pumping water mixed with sand.

The sand kept cracks partially open when water injection stopped, increasing permeability and gas flow.

A sedimentary rock deposit has a limited depth but very wide area (sometimes hundreds of square miles). Traditional vertical drilling into a deposit 20 metres deep can yield gas production from a zone of just 20 metres. But new techniques have facilitated horizontal drilling. This makes possible horizontal wells running hundreds of metres long through shale strata, greatly increasing the production zone of each well. Horizontal drilling plus sand cracking have revolutionized the economics of shale gas in the US, and made it a boom industry.

Huge shale deposits lie at shallow depths across the world, and can be explored at a tiny fraction of the hundreds of millions involved in deep offshore wells (as in the Krishna-Godavari basin). The low cost per well compensates for the low yield per well. The share of shale gas in the US gas production has moved up from zero to 8%. One single deposit, the Barnett Shale in Texas, produced 1.1 trillion cubic feet of gas in 2008, and other deposits (Bakken, Haynesville) could be as productive. Anadarko Petroleum is ramping up drilling in the relatively lowyielding Marcellus Shale (stretching hundreds of miles from West Virginia to New York), aiming to achieve a 10% rate of return at a gas price of $2.50/mm British Thermal Unit. This is well below the current US price of $3.70, and a fraction of the $13 in June 2008. It is also well below the $4.20 the government has fixed for KG basin gas, and is close to the $2.34 Anil Ambani is demanding. So, at least some shale gas deposits look entirely economic.

Why has no company in India explored for shale gas despite several rounds of bidding for exploration blocks in the last two decades? The sad answer is that our exploration policy allows companies to produce only conventional oil and gas from their exploration blocks. If they find non-conventional energy — such as coal-bed methane or shale gas — they are forbidden to produce this! Why? Because, the petroleum ministry regards any non-conventional deposit as an unwarranted windfall for the exploring company, and wants separate bidding for non-conventional energy. For coalbed gas, it has called for bids and awarded exploration contracts in known coal deposits. But gas can also be found in deep coal deposits unknown today. When drilling for oil, Indian companies have already hit thick coal seams deep underground, but not bothered to test these for gas because they would not be allowed to extract it.

The same holds for shale gas. When drilling for oil, every company hits shale deposits, but ignores their gas potential since they are not allowed to harness it.

Clearly, two changes in exploration policy are urgently needed. First, the government needs to come out with a shale gas policy. It should facilitate seismic surveys that can quickly delineate potential shale gas deposits, and then invite bids for exploration.

Second, all future exploration contracts for oil should permit exploitation of shale gas as well as conventional gas. That will make it worthwhile for companies to investigate shale gas they may find while drilling for conventional hydrocarbons.

These policy changes will not cost the government a rupee. They will simply relax the boundaries of exploration. That alone can make a big difference.

Is the Red Dragon snarling again?

The India-China theatre is a hotbed of activity. There are Chinese intrusions on the border and Indian protests, Chinese military build-up and
India huffing and puffing to catch up.
Separately, China is building strategic stakes in India's neighbourhood, while India appears to be watching helplessly. Globally, the global economic crisis is catapulting China to the high table faster than India can say 'George Bush' - see how China only has to say "boo" for Barack Obama to keep Dalai Lama out of the White House.

Meanwhile, the boundary dispute remains unresolved because China has been repeatedly intransigent. On the other hand, India and China are on the same page on global issues, and on trade they are dancing their way to the bank.

Through all this, India maintains what appears to be a strange policy of appeasing the dragon. India allows the Dalai Lama to visit Arunachal in the teeth of Chinese howls, but pretends that intrusions by the Chinese have happened for years and the definition of "peace and tranquillity" is the absence of violence.

It all boils down to a failure to resolve the boundary dispute. While officials say they are moving "slowly but surely", strategists across the board in India say China's policy of low level intrusions serves to keep India off-guard, confused and groping and under pressure on the boundary. Its also a signal to India's other neighbours that India continues to fall short in being a "balancing power".

Ultimately, it has to do with Tibet, Tawang and the Dalai Lama. Tawang was always sacred for Tibetans, but China has only recently upped its claims for the state as it works through the Tibetan question, particularly giving itself the power to appoint the next Dalai Lama. Earlier, China wanted to do a swap of Aksai Chin and Tawang, but that’s off the table now.

But India is slowly learning to deal with a superior strategic competitor, its skills rusted by years of Pakistan-centric foreign policy. Speaking Punjabi works wonders in Pakistan, but knowing Mandarin doesn't always help in Beijing. Its the hard-nosed approach that does, and India is only now swallowing this unpalatable fact.

For the first time, the Indian envoy in Beijing was chosen for his professional skills rather than his language proficiency. During the most recent round of border talks, India told China it would insist on Chinese commitment to the 2005 Guiding Principles where it agreed that while demarcating the boundary, interests of settled populations would be taken into account. Extrapolated, it meant that Arunachal Pradesh would stay with India. The Chinese subsequently went back on that commitment, and India let them. Until now.

In the Indian Ocean, India is putting strategic stakes in Maldives, and Mauritius to assert its maritime power, and reasonably hopeful of courting the Sri Lankans away from the Chinese. As former foreign secretary Shiv Shankar Menon said in a lecture, "the Chinese don't have any bases in the Indian Ocean." Its an important reality check in the middle of all this hype. There also appears to be some fresh thinking on developing the Andaman & Nicobar Islands as a strategic post, as indicated by Shyam Saran, PM's special envoy, which would, if done right, take care of the Chinese "threat" in Myanmar. India is learning much needed lessons from tiny Taiwan that dealing with China needs nerve and grit - never India's strong suit.

On the Himalayan heights, however, the reality is very different, and frankly, India is largely responsible. While some of the "incursions" on the LAC are highly exaggerated by hyper-reporting, its undeniable that China's PLA has been guilty of intrusions and aggressive patrolling for at least a year now.

"Violations" by Chinese forces particularly in the western sector, resulted in 2285 instances in 2008, as compared to 778 instances in 2007. While Arunachal Pradesh has been repeatedly hit in the eastern sector, the Chinese have even opened up the resolved Sikkim border and the middle sector.

Militarily, China is streets ahead of India, with some 13 border defence regiments and many brigades along the border, so if, in these heated days, a conflict does indeed break out, India will be toast. China enjoys geographical advantage on the LAC and has built an advanced system of logistics. Indian troops have to go through much tougher terrain to get to their forward posts. China has built rail links between Beijing and Lhasa and onward to Xigaze and Yatung, near Nathu La. Lhasa could then be a train ride away from Nyingchi, just north of Arunachal. In the western sector, China is widening the Karakoram Highway, which links China to Pakistan, from all-weather traffic.

China is certainly a challenge, but India has to learn to face it openly rather than ducking behind diplomatic platitudes. There needs to be a multi-hued China engagement policy - for instance, unlike Pakistan, more engagement is always better with China, because frankly, Indians don't "understand" the Chinese. Can India start a "peace process" with China?

SNAPSHOTS