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Saurav Jha
Wednesday, November 14, 2012 at 11 : 56

The Shale Gas Revolution in America: An Opportunity for India


Good news is seldom expected in the world's hydrocarbon economy and the shale gas boom in North America follows that trend. The rise of this unconventional source of natural gas has created a situation whereby the United States (US) may become a net exporter of the same by 2016 thereby opening up a hitherto unexpected source of supply for gas-hungry countries such India. India, which is increasingly dependent on liquefied natural gas (LNG) imports to bridge the domestic demand-supply gap, needs to diversify imports away from volatile regions and oil indexed contracts. However at the moment the US allows permit-less exports of domestic natural gas to only those countries with which it has a free trade agreement (FTA) and this is proving to be a significant hurdle for Indian majors looking to source from the US market.

The changed scenario can be gauged by the fact that till even 2006 most analysts were predicting that the US would have to continue to depend on imports till at least 2030. Accordingly some 10 LNG re-gasification terminals (import) came up mainly along the eastern seaboard of the US. Circa 2012 however, the Energy Information Administration (EIA) projects that US domestic production ( which already covers 94 per cent of consumption) will rise some 29 per cent by 2035 with more than half of the projected increase coming from shale gas plays which already account for a quarter of annual output. Shale output currently accounts for around 25 per cent of total natural gas production in the US and has created a situation where US working reserves are at a five year high with storage having become an issue.

This greatly increased availability of natural gas from unconventional sources in the US has of course led to a dip in gas prices. The Henry Hub, which is the main US gas benchmark traded on NYMEX has consistently recorded around the $3 per million British thermal units (mmbtu) for the past few months.

To put this in perspective, Asian LNG cargoes ex-ship has been delivered at up to $18 per mmbtu after the nuclear shutdown in Japan post-Fukushima. Clearly a time has arrived where suppliers in the US will be increasingly looking at global markets to take advantage of arbitrage opportunities. Even today, 67 per cent of the LNG imported by the terminals at Cameron, Sabine Pass and Freeport are being re-exported (re-exports to non FTA countries require US Federal Energy Regulatory Commission approval) by them in 2011.

However, LNG import terminal operators in the US are now looking beyond merely the right to re-export and want to secure approval for exporting domestic LNG to non-FTA countries. Ten such proposals are currently pending with the FERC with only Sabine Pass having been approved in April this year. These approvals are essentially for siting liquefaction facilities at existing import terminals and would require substantial investment (typically over 1000 dollars per tonne per annum) as well as producer commitments.

Now even as the US turns a net exporter of natural gas, the situation is unfortunately not as rosy for India. Lacklustre production from highly touted estates such as the Krishna Godavari (KG-D6) field means that India has to increasingly turn towards LNG imports. Demand by 2014-15 will touch 356.16 million mmscmd and will rise further to 473 mmscmd in 2017-18 at a compounded annual growth rate of 19.5 per cent for the next five years. Domestic production will unfortunately only yield about 240 mmscmd by that time. Anticipating this, heavy investment is being made into LNG re-gasification terminals and India's total LNG re-gasification capacity seems poised to rise from 13.5 million tonnes per annum (mtpa) currently to 48 mtpa by 2017-18.

Naturally given the projected import requirements India is now on the lookout for cheaper gas. Unfortunately in the absence of a true worldwide liquid spot market for natural gas its price varies across regions typically being indexed to the price of crude in long term contracts. For instance India's current LNG suppliers such as Qatar's RasGas charge 12.67 per cent of Japan Customs-Cleared Crude (JCC) and Petronet LNG pays a further 0.26 US dollars per mmbtu for shipping and that translates into 12.93 US dollars per mmbtu at current JCC prices. What is more RasGas is apparently demanding that the indexation be increased to 14 percent.

It is not surprising therefore that Indian majors such as GAIL are increasingly attracted to the US where Henry Hub linked supplies are becoming available. GAIL has for instance sewn up a contract with Houston-based Cheniere Energy Partners LP (CQP)'s to source 3.5 million tons of LNG a year for twenty years from Sabine Pass - the only terminal approved to export LNG to non-FTA countries. GAIL will pay a capacity charge between 2.5 dollars-3 dollars + 115 per cent markup on Henry Hub per mmbtu. So if we assume 3 dollars as the Henry Hub price this means that GAIL will pay 8.95 dollars - 9.45 dollars per mmbtu under this deal and that is better than what any Indian importer is paying at the moment. This deal involves gas being made available from GAIL's upstream investment in Eagle ford shale where it has a 20 per cent stake bought from Carizzo Oil & Gas Inc thereby ensuring that Indian investment in shale fields actually leads to that gas reaching Indian shores.

Unfortunately as GAIL and other Indian majors such as ONGC look to pursue similar deals with other LNG terminal operators in the US they are thwarted by the fact that FERC approval for non-FTA exports is still pending for most of these terminals as pointed out above. Getting an approval for setting up liquefaction facilities at an LNG import hub is an arduous process and requires public hearings conducted by the FERC under Section 3 of the US natural gas act and must be deemed to be in the 'national interest' of the US. Such approvals can take up to three years judging by the example of Texas Freeport and if you add another three and half years as the typical lead time for building a liquefaction train one begins to understand that more LNG import deals with US companies are some distance away.

Japan has already indicated that it can't wait that long and wants a FTA waiver now given that most of its reactors are still shutdown post Fukushima and it needs gas for substitute power generation. India should demand the same given that Indian companies have demonstrated that they are willing to make substantial investments both upstream and downstream in the US gas sector- something that US producers clearly need, to keep riding this boom.

Today, we are faced with a lopsided situation where LNG hungry but non-FTA countries such as India and Japan are unable to automatically source domestic US LNG while, gas rich countries many of whom already have an FTA in place with the US can actually use this fact to lock in future US supplies for greater cartelisation in natural gas markets!

Meanwhile another option that can be pursued is to route gas via Canada (which already has an FTA with the US) by investing in the LNG import terminal at Saint John, New Brunswick and add liquefaction facilities. Saint John is rather close to the giant Marcellus shale play in the north-eastern US with two gas pipelines crossing the US-Canada border in the vicinity. Such a move would also require clearance from Canada's National Energy Board although this could probably be secured relatively quicker.

Be that as it may a recent study by the EIA projects only a 54 per cent rise in US wellhead gas prices over a 20 year timeframe beginning 2015 in a worst case scenario of rapidly growing exports and lower than expected reserves coupled with a strong US economic rebound. Even in this unlikely situation Henry Hub linked LNG imports from America will probably be cheaper than Asian LNG contracts and US policy makers could realise that a win-win US-India energy partnership in gas might just be in the offing.


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More about Saurav Jha

Saurav Jha studied economics (and debated politics) at Presidency College, Calcutta, and Jawaharlal Nehru University, New Delhi. He writes and researches on global energy and security issues and is a regular contributor to publications such as World Politics Review, The Diplomat and Le Monde Diplomatique, and has written for Deccan Herald, The Telegraph and Hindustan Times. He is the Consulting Editor of Geopolitics magazine. His first book, The Upside Down Book of Nuclear Power, was published in March 2010 to excellent reviews. He is presently working on The Heat and Dust Project, a quirky travelogue, based on an intense budget journey through India, co-authored with his wife Devapriya.