Shale gas, not Iran pipeline, our energy hope

[vinod2070]

Shale gas, not Iran pipeline, our energy hope SWAMINATHAN S ANKLESARIA AIYAR

External affairs minister S M Krishna visited Tehran in mid-May and said India was still interested in the proposed Iran-Pakistan-India (IPI) gas pipeline, but expressed reservations on security grounds. However, there is now a more important economic reason to oppose the pipeline. The IPI gas price has become ridiculously high in the light of new technology for extracting gas from shale, a common sedimentary rock found across the world. The IPI project never made sense from a security viewpoint. It now makes no sense from an economic viewpoint.

The US has pioneered shale gas technology. This has created a glut, sending gas prices plummeting from $13/mmbtu (million British thermal units) four years ago to just $4/mmbtu today, even as the price of oil has more than doubled. By contrast, the IPI formula links the gas price to oil prices. This implies that India will have to pay $10/mmbtu at today’s oil price of $70/barrel, and a whopping $20/mmbtu for gas if oil returns to its 2008 peak of $150/barrel. India cannot possibly accept such a price formula when shale gas technology has sent prices plummeting.

It must insist that the Gulf countries abandon the old price link between gas and oil, and accept the new low prices established at trading hubs like Henry Hub in Louisiana. Iran, Qatar and other Gulf countries are aghast at the emergence of shale gas as a rival, and want to stick to the gas-oil price link. India must refuse to do any gas deals with them until they drop the link.

Indeed, India may need no gas deals at all with Gulf countries for a long time. Gas from the Krishna-Godavari offshore basin is going to flow in huge quantities in the next few years, making India self-sufficient. New gas deposits are constantly being found offshore.
Besides, India also has massive shale deposits, and should give priority to exploiting these over sinking billions into a highly dubious pipeline through Pakistan. Reliance Industries Ltd has been the first to grasp the new opportunity. It has just bought a 40% stake in the operations of a US company, Atlas Energy, in the Marcellus Shale, a huge deposit extending from New York to West Virginia. Reliance is looking for maybe two more shale gas acquisitions in the US, and Essar Oil will probably follow suit. The ONGC, as always, is slow off the mark, but will lumber into this game soon. Gaining experience and technology in the US can help Indian companies launch a large shale gas programme in India.

Shale has long been known to contain gas, but this does not flow from a normal well since shale is not porous. The new technology cracks open shale with sand and water under high pressure, opening up the formation and allowing gas to flow. The share of shale gas in the US gas production has shot up from zero to 8% in the last decade. One single deposit, the Barnett Shale in Texas, produces 1.1 trillion cubic feet per year, and other deposits (Bakken, Haynesville) could be as productive.

Four years ago, US companies thought a gas price of at least $6/mmbtu was needed to make the extraction of shale gas viable. But as technology has improved, shale gas has become viable in some cases at just $3/mmbtu. Indeed, Anadarko Petroleum thinks it can produce gas from the Marcellus shale at just $2.50/mmbtu. This is well below the $4.20/mmbtu set by the Indian government for offshore gas.

India has huge shale deposits spread across the Gangetic plain, Assam, Punjab, Rajasthan, Gujarat and southern coastal areas. All these are potentially gas bearing. The government has no policy framework for shale gas, and needs to devise one quickly so that exploration can begin. Seismic surveys on a massive scale are needed to produce basic data. If these data are then made available to bidders, prospective shale gas deposits can be put on the bidding block.

In the case of offshore gas, the government has given itself complete powers of price control. This has kept foreign companies away from the last round of bidding. For shale gas, blocks must be auctioned with a clear provision that there will be no price control.
Europe is frenziedly getting into shale gas, hoping to reap a bonanza as in the US, and also free itself from dependence on Russian gas. India needs to provide terms for shale gas blocks that are at least as good as European terms. That alone will attract global firms with the necessary technology.

[vinod2070]

The IPI pipeline is not the solution to our energy requirements, both from economic and security angles.

The gulf states want to extract the last pound of flesh from the world for the energy resources. The shale gas deposits are much more evenly distributed across the world and provide India and much of the world with a real hope of energy independence from these Shylocks of the big oil and the Shekhs.

India has the opportunity to be energy independent with the vast resources of Shale gas and oil and the Thorium reserves. These are not as easy to exploit as the oil and gas but the new technologies should make them economic and efficient.

[vinod2070]

By contrast, the IPI formula links the gas price to oil prices. This implies that India will have to pay $10/mmbtu at today’s oil price of $70/barrel, and a whopping $20/mmbtu for gas if oil returns to its 2008 peak of $150/barrel. India cannot possibly accept such a price formula when shale gas technology has sent prices plummeting.

It must insist that the Gulf countries abandon the old price link between gas and oil, and accept the new low prices established at trading hubs like Henry Hub in Louisiana. Iran, Qatar and other Gulf countries are aghast at the emergence of shale gas as a rival, and want to stick to the gas-oil price link. India must refuse to do any gas deals with them until they drop the link.

I think this artificial linkage is a matter of time. These monopolists just want to extract the last pound of flesh while they still can. The emergence of new technologies may hopefully cut them to size.

Meanwhile the rest of the world should gang up on them as they are ganging up. Let them pay through their nose for food, water and all industrial goods that they can't produce on their own.

[vinod2070]

Iran pipeline will be Pakistan’s Enron SWAMINATHAN S ANKLESARIA AIYAR



Swaminomics declared last week that India must forget the proposed Iran-Pakistan-India gas pipeline because of the outrageously high cost of Iranian gas. Some readers have asked, “Why is Pakistan willing to pay the Iranian price, and go ahead with the project minus India?”

Answer: The pipeline is going to become Pakistan’s Enron. It will drive Pakistan towards bankruptcy and be aborted, just as Enron drove the Maharashtra government towards bankruptcy and was aborted.

Iran and other Gulf producers have long linked the price of gas to that of oil. This was acceptable for decades when oil prices, and hence linked gas prices, were subdued. But oil shot up from $14/barrel in 1995 to a peak of $150/barrel in 2008, and it is still around $75/barrel today.

Iran and Pakistan have agreed on a gas price linked to 80% of the Brent crude oil price. This would have been fair in 1995 but not any longer as oil is up from $14/barrel to $75/barrel.

In a recent interview with Newsline magazine, former Pakistan petroleum secretary Gulfraz Ahmed declared bluntly, “I am now appalled to know that the present negotiations are in the region of 80% of Brent crude.” He adds, “We need this gas urgently, but on the other hand, not at this price.”

He recalls that his original negotiation in the 1990s was for a gas price of $2.05/mmbtu (million metric British thermal unit) from Iran. But the new gas deal implies a price of $8/mmbtu if oil is $60/barrel. If oil goes up to $100/barrel — very likely in the next year or so — the gas price will soar to $13/mmbtu. And if oil returns to its 2008 level of $150/barrel — entirely possible when the Iran-Pakistan pipeline is completed in 2015 — gas will cost a mind-boggling $20/mmbtu, or 10 times as high as originally negotiated in the 1990s.

The cost of 5,000 MW of power to be generated from the gas will rise correspondingly. If oil costs $100/barrel, the linked gas price will translate into an electricity price of around Rs 7.50/ unit. Remember that Enron had to be closed when its price rose to just Rs 4.25/unit: the Maharashtra government said this would empty its coffers.

When Pakistan begins generating power with Iran gas in 2015, oil could be as high as $150/barrel. If so, the corresponding cost of electricity will be Rs 11/unit. Producing power at that price will be economic suicide.

Why has Pakistan got itself into such a trap? Well, don’t be surprised: many Indians still want to join this project. Politicians and strategy wonks can be so fascinated by projects with political appeal that they forget commercial sense. The Left Front is dying to join the project just to spite the US. Pakistan too has foreign policy wonks who see the pipeline as a way to kick the US and display solidarity with Islamic neighbours, oblivious of the suicidal cost.

When Enron proposed its 2000 MW plant in India, this was seen as a fabulously strategic project, worth paying a premium for. At the time the state electricity boards were bust, and India had a terrible power shortage. In this energy desperation, the Enron project was grasped eagerly and cleared at record speed, notwithstanding warnings about the cost. Many hoped this strategic deal would open the gate for dozens more foreign investments.

Fifteen years later, Pakistan also has a terrible power shortage. It too suffers from energy desperation, and so is eagerly grasping a massive power project based on Iranian fuel, ignoring warnings from its own experts about the cost.

Gulfraz Ahmed mentions a third reason for Pakistan’s behaviour: lack of negotiating skills to understand the risks of a 40-year deal with an unfavourable pricing formula. This happened in Enron’s case as well. In both cases the negotiators failed to realize the risks of a contract linked to world oil prices (which could shoot up) and denominated in dollars (the electricity price shot up every time the rupee declined).

Critics of Enron shouted “corruption”. More than 20 cases were filed against the project but all were dismissed by the courts — there was no hard evidence. However, many Indians remained convinced that money had changed hands because Indian politicians are so obviously corrupt. I predict that the Iran gas deal will also be widely condemned as corrupt in Pakistan once the high cost of electricity becomes patently obvious.

Corruption charges are a distraction. The Enron fiasco was caused by a combination of energy desperation, incompetent negotiation, and fanciful notions of strategic importance. Pakistan faces a similar fiasco for the same three reasons.

[vinod2070]

Neo, the IP pipeline doesn't make sense for Pakistan economically.The consumers (domestic or industrial) can't afford to pay the cost and and subsidies will ruin the economy.

If Pakistan wants to do it for reasons of Islamic solidairty, let Iran show some solidarity as well and sell the gas at a price that makes sense for the Pakistani consumer.

Maharashtra is India's richest state with a GDP greater than Pakistan with almost half the population. If it could not afford a power price a fraction of what it would cost the power from the IP pipeline, Pakistan can hardly afford it.

[Selma Shirazi]

Interesting article V.
Do we have shale gas reserves in India and Pakistan?
What are the estimates and how long does it take to build infrastructure to
produce 3 billion cfm per day (Pakistan's requirement 2010)?

[vinod2070]

Shale gas is available pretty much around the world. India is estimated to have large deposits, I am not sure about Pakistan but I assume it would too have good deposits.

I think the numbers you talk of would take a decade at the least if you start tomorrow. India doesn't even have a Shale gas policy at this point. In fact the government doesn't even allow the companies to produce shale gas at this point with their current licenses.