For decades, India has kowtowed to Gulf countries, notably Iran. With large shale gas deposits and new technology to extract it, India can afford to act tough.
The Indian government remains asleep to the revolutionary potential of shale gas, which promises to revolutionise both the world energy scene and global geopolitics.
Russia, Iran and Opec are going to be greatly weakened, while the US, Europe and China will be greatly strengthened. India can be a major beneficiary.
First, shale is a common sedimentary rock found in most countries, so shale gas can hugely reduce the dependence of most countries (including India) on imported energy.
Second, the geopolitical clout of major gas exporters — Russia, Iran, Algeria, Bolivia — will fall dramatically. Third, some countries may start converting their transport fleets into gas-based ones, hitting the demand for and prices of petrol and diesel. Fourth, converting gas into oil will become economic.
Shale has long been known to contain natural gas, but this was not worth extracting with conventional technology. Now a new technology, ‘fracking', plus horizontal drilling, have greatly increased shale gas productivity, so extraction is now viable at $3-4/mmbtu.
The new technology has been pioneered in the US so successfully that the US has overtaken Russia as the world's biggest gas producer. US gas reserves have increased from 30 years consumption to 100 years consumption. Port terminals to import LNG (liquefied natural gas) into the US will instead export LNG to Japan.
The US dream of energy independence remains fanciful, but its dependence can indeed fall dramatically. Historically, the price of gas was linked to that of oil: gas cost one-sixth to oneseventh the price of oil.
That equation has been smashed in the US, where oil costs $72/barrel but gas costs one-eighteenth as much ($4/mmbtu).
Poland and Ukraine, totally dependent on Russian gas, are rushing to find shale gas and free themselves from Moscow. Georgia, another Russian dependent, also seeks energy freedom.
Russia has an iron grip on its ‘near abroad', countries that used to be part of the USSR. But that grip will loosen dramatically if shale gas is found in large quantities in Eastern Europe.
Many Western European countries are rushing to acquire shale gas technology. Exxon Mobil is the front-runner in European exploration, but Shell is following suit.
This dismays Algeria, a major supplier to Western Europe, which wants to create a gas cartel like Opec. The chances of this are zero.
Indeed, LNG facilities created in the Persian Gulf to supply the US are becoming redundant, so supplies will have to be dumped on Europe and Asia. India must take advantage of this.
Gazprom, the Russian gas monopolist, admits that it has been forced to delink 15% of its supplies from the price of oil, and instead accept links to spot gas prices at trading hubs like Louisiana's Henry Hub, which sets the US benchmark price.
Holland has a gas hub at Zeebrugge and Britain at National Balancing Point, and a new hub is coming up in Germany. At these hubs the spot price is determined by the interaction of multiple buyers and sellers, replacing the old prices linked to oil. The Financial Timesreports that half the gas contracts in Western Europe are now linked to spot prices.
PetroChina estimates that China may have 45,000 billion cubic metres of shale gas, more than Russia's proven conventional gas reserves. China used to be an oil exporter but in recent decades has become a major importer of oil and LNG.
Chinese demand helped push oil to $150/barrel in 2008. In the next 10 years, shale gas may significantly reduce China's import demand.
World oil prices may keep rising for another five years, but could plateau or fall after that. China is also exploiting its coal-bed methane reserves of 170 billion cubic metres.
Gas can readily substitute fuel oil in industry and power generation, and kerosene in cooking. But the bulk of oil consumption is in transport. Compressed natural gas (CNG) is powering buses and three-wheelers in Delhi and other cities.
However, setting up CNG facilities across countries and converting vehicles to run on CNG remains a major challenge. It may never happen in the US. Authoritarian China, however, will surely push through such a change. This may be phased over a decade or more, but the price impact will start showing up earlier.
India has large shale deposits, with good prospects in the Gangetic plain, Punjab, Rajasthan, Gujarat. Tamil Nadu, Andhra and the north-east.
India must get cracking on seismic surveys followed by allotment of exploratory blocks. Companies should be able to acquire blocks any time based on a predetermined revenue-sharing formula.
Mukesh Ambani will probably be the first to start exploration, but others will follow quickly, including Anil Ambani (who is already in unconventional gas through coal-bed methane).
Large shale gas discoveries should embolden India to convert transport fleets in all cities from petrol and diesel to CNG. That will reduce not only energy dependence but pollution too.
Reliance has considered converting some KG gas into oil. Now that gas has become cheap relative to oil, it should go ahead. Other refiners — Essar, IOC, BPCL and HPCL — should consider this option too.
For decades India has kowtowed to Gulf countries, notably Iran. It can now afford to act much tougher. Iran supported Pakistan in Indo-Pak wars, and blasted India for Pokharan-II, and demanded that India sign the NPT.
Iran nationalised the Rostam and Raksh oilfields in which the ONGC had a stake. It reneged on a contract to supply cheap LNG top India after Ahmedinejad came to power.
Despite this India has been deferential to this potentially powerful energy supplier. That must now change.
India must tell all Gulf producers that it will pay gas prices linked not to oil but to the Henry Hub price. The best starting point is not Iran but Qatar, which has just completed a gigantic expansion to become the world's largest LNG supplier.
This is now in surplus. Qatar wants $10/ mmbtu. India must offer just $4. Once Qatar gives way, so will other LNG exporters, including Australia.
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