India taps US for shale gas expertise

India is seeking an exclusive partnership with Washington to tap domestic shale gas reserves, a rich source of energy where the US is the global technology leader. The proposed India-US cooperation agreement in this area is expected to boost India’s efforts to produce gas from its own identified shale resources, besides finding other sources of these fine-grained sedimentary rocks.

The petroleum ministry and the US department of energy are leading the bilateral talks right now and soon, the interactions would begin at higher levels, said a government source privy to the development. While technology transfer on commercial terms by the US would be key to the proposed alliance, India would also simultaneously frame the regulatory framework for auctioning shale blocks for exploration.

According to official sources, the petroleum ministry has also decided to seek a seven-year tax holiday from the finance ministry on profits from shale gas business.

Reliance Industries, India’s largest private company, has already stepped in by acquiring 40% in Atlas Energy’s leasehold in a shale gas field in the US. The proposed pact with the US would help India's public sector oil explorers like ONGC and OIL, besides private players like RIL and RNRL which are keen on this potentially lucrative and carbon-efficient energy.

The agreement will encompass a wide gamut of areas including sharing of geological expertise as well as exploration and production technology. It is expected to lead to a wave of cross-border joint ventures for the difficult and expensive exploration of shale gas reserves in India.

India wants tech-savvy US firms which scripted the shale gas success story in North America to help domestic firms build a shale gas industry from the scratch, said sources. India would also seek to benefit from the US’ wealth of experience in the policies and the regulatory framework for shale gas exploration, including environment protection.

Participation of US firms is important for shale gas production here as they have the required expertise in horizontal drilling — a new technology that allows greater access to the most productive layer in underground rocks and in hydraulic fracturing — a way of creating fractures in underground shale formations with the
help of fluids.

It would also make sense for gas producers in the US who are facing a price depression due to the slower growth in the economy to have a share in the gas market in a fast-growing developing economy like India, where energy demand far exceeds supply and is set to grow manifold. India allows full foreign ownership of companies in the oil and natural gas sector, including exploration, pipeline infrastructure and trading.

An India-based oil and gas expert who is in regular touch with the US department of energy said that since it is a government-to-government deal, Indian public sector companies like ONGC and OIL could benefit more.

“The nature of private sector participation from the US as well as technology sharing could depend on negotiations between individual investors,” said a government source. The ministry would be a facilitator.

According to Vamsi Maddimsetti, associate director, transaction advisory services and oil and gas expert at Ernst & Young, India could benefit from the policies on attracting investments, the necessary regulation and controlling environment damages due to shale gas exploration from a mature market like the US, where 30% of total natural gas production comes from shales.

“The second aspect is access to technology, which plays an important role in this industry. Since shales are less permeable rocks, the biggest challenge is getting the gas out, unlike conventional gas. A producer’s ability to fracture rocks effectively at low cost decides the cost of exploration and production, which is important for a country like India with a significant amount of price sensitivity,” Said Maddimsetti.

“Cooperation between the petroleum and natural gas ministry in India and the US department of energy can help the Indian government and the upstream regulator get the much-needed insights into building a shale gas industry. It can also help India gain knowledge about how this market moves globally,” said Deepak Mahurkar, associate director, PricewaterhouseCoopers India.

Director General of Hydrocarbons, the country’s upstream oil regulator, has been asked to prepare a regulatory regime to license out shale gas blocks for exploration, the source said. Once the legal frame work is in place, the government would invite bids.

The petroleum ministry will also propose seven year tax-free profits from shale gas production in India, but a final call on this would be taken by the finance ministry, said another government official.

The finance ministry is, in principle, opposed to giving more tax exemptions because it would reduce the government's ability to lower the overall rate of taxation in the new direct tax code. For the forthcoming ninth round of bidding for exploring oil and gas, the finance ministry has denied tax-free profits citing the same reason. But a final call on both would be taken at the political level, conceded a finance ministry official.

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