There’s an important conversation we are not having right now. There are screaming headlines we have not had to read over the past few years. Iran, Mexico, Norway and Venezuela, four of the ten largest producers of oil until a decade ago, have seen enough production drops in the past decade to have alarm bells ring among traders and analysts, leading to oil prices spikes and supply shortages.
In such circumstances, news TV channels and newspapers would have normally hosted heated debates on energy security, energy independence and the impact of high oil prices on macroeconomic fundamentals – but none of it happened. An unlikely ‘saviour’ emerged in the form of the American ‘Shale Revolution’. Oil (and gas) production in the United States from ‘shale deposits’ has spiked since 2008, matching one-for-one the drop by other countries, ensuring the stability of global supplies. In this process, the US has become the world’s largest producer of crude oil. That’s correct, the United States now produces more oil than even Saudi Arabia. The availability of oil and gas from shale formations has permitted the US to reduce oil imports and to move from coal to gas (which is far cleaner) for electricity production.
Globally, oil (and gas) is produced by drilling and extracting from “conventional” reservoirs: it works like putting a straw into a coconut and sipping out the water. Production from shale formations, on the other hand, requires a technique called “fracking”. Since the rocks (or sands) that contain the oil (and gas) are not porous enough for the oil to flow out with little effort, the flow has to be stimulated by fracturing the rock using pressurised liquids. Without getting into technicalities, production from shale or tight sand deposits prove to be far costlier than extracting from conventional reservoirs.
While fracking in different forms has been going on for decades, the technology became commercially viable only a few years ago in the United States. While three other nations (Canada, China and Argentina) also produce shale oil and gas, only the US does it at a large scale. Interestingly, unlike Saudi Arabia, India and other producers, the US has no ‘National Oil Company’ which dominates production: scores of small private companies produce in a disaggregated, uncoordinated and unplanned manner, responding to market conditions independently. The presence of an extensive pipeline network helps small companies come on board without having to spend on supply infrastructure.
The success of shale oil and gas production in the United States has prompted the governments of several countries to develop their own shale programmes. However, they have largely been met with failure due to the lack of economic viability, environmental concerns or legal hurdles.
In India, estimates of shale gas resources vary from 63 Trillion Cubic Feet (TCF) by Energy Information Administration (US) to as high as 2000 TCF by Schlumberger, of which the recoverable resources range between 100 and 300 TCF. In comparison, India has 50 TCF of conventional natural gas reserves. In order to tap this resource, the Government of India came out with a Shale Gas and Oil Policy in 2013, which restricted exploration and production to National Oil Companies only. Consequently, ONGC and OIL were given blocks mainly in Gujarat to test shale production technology and potential.
Since then, there has been no formal communication on the success of these test wells. However, officials from the industry and the government will privately tell you that they have largely been unsuccessful. While the industry has been calling for opening up the field for private players, there are sound reasons to tread with caution. Fracking requires the use of large quantities of water in the extraction and production phase, which could prove to be an issue in a water-stressed India. Further, there may be environmental impacts due to the use of fracking fluids. Partly for these reasons, and partly due to its economics, several countries (including Poland, China, Argentina) have scaled back their shale oil and gas plans. For the moment at least, the United States is proving to be the only successful large scale shale oil and gas producer.
Siddharth Singh works at The Centre for Research on Energy Security at The Energy and Resources Institute, Delhi. Views are personal.
He writes about Energy Security & Energy Economics on his blog, The Energy Factor, a part of Business Standard’s platform, Punditry.
He tweets as @siddharth3
Email: s_singh@outlook.com
