India Shale Gas Investing

Brian Hicks

Written By Brian Hicks

Posted August 15, 2013

I know you’re feeling frustrated as a natural gas investor.

The Department of Energy is not approving enough LNG export facilities so prices can bounce back, and there are companies and special interest groups, like Dow Chemical (NYSE: DOW), that want prices to remain low to fuel their factories on the cheap.

shale gas 19Natural gas prices have been inching up, but not enough for producers to ramp up production.

To paraphrase Ronald Reagan, you can vote with your feet.

Of course, there are still good areas to invest in natural gas in the U.S., including companies in Texas that ship natural gas to Mexico. And auto companies like Ford (NYSE: F) and Honda (NYSE: HMC) have their own vehicles that run on CNG.

But if you’re not satisfied with the current investment atmosphere for natural gas, park your investment dollars elsewhere.

India may be a good place to look.

India’s fledgling energy grid and bustling economic growth has the nation starved for energy sources. India is heavily reliant on coal and oil imports, but these still don’t come close to meeting demand. So the nation has developed the yearning to foster domestic shale production.

There are six basins that look promising, including Assam-Arakan, Gondwana, and Krishna-Godavari.

Now, I should point out that India has stalled on its shale pursuits for now. The companies that will get first dibs on shale drilling are the ones that have been in India for the longest, but even those companies have reservations about shale gas investing.

Two of the largest companies in India are Oil and Natural Gas Corp. (NSE: ONGC) and Oil India Ltd (NSE: OIL). Both of these companies hold 356 blocks, 176 of which may contain shale reserves, Reuters reports.

But these companies may have to produce shale resources whether they like it or not. They are locked into old contracts that require them to produce energy regardless of the source, and that includes shale.

But here is where things get tricky.

There is some confusion between old and new contracts that the Indian government needs to clarify. Old contracts stipulate that unconventional resources could be covered, but new contracts with such companies as Reliance Industries (NSE: RELIANCE), Cairn India (NSE: CAIRN), and BG (LSE: BG) states that energy sources related to natural gas and oil need to be produced, but this excludes unconventional resources like shale.

This is a matter that needs to be addressed if any foreign investment is to take place. But India does have a plan; it will take at least three months for officials to draw up a cohesive policy for shale gas production.

But there’s another obstacle in the way that you need to be aware of.

India is suffering from drastic water shortages – something that could prevent the use of fracking, which is essential if India, and China for that matter, are going to engage in shale production.

There is a sign of hope; Petroleum and Natural Gas Minister Veerappa Moily believes the current policy that India is drafting for shale gas will be a “game changer,” as he told Reuters.

We’ll see if his words can deliver.

Natural Gas Hotspots

If you’re seriously considering investing in Indian shale gas, I would wait until the official guidelines debut before making a decision.

For now, at least, shale gas in India is in its development stages, and there has not been an open-door policy for outside investment.

In the meantime, one important place to look out for is Poland, since the government there is looking to develop shale resources to get away from Russian imports.

Companies like Exxon Mobil (NYSE: XOM) and Marathon Oil (NYSE: MRO) pulled out due to the lack of commercially exploitable hydrocarbon reserves, but Chevron (NYSE: CVX) is sticking with it, and there may come a time when commercial development will be an attainable goal in Poland.

Mozambique also has a robust natural gas sector, and there is plenty of wiggle room for energy companies there to export abroad.

The U.K. is another place that is hoping to extract its shale deposits, and officials there are offering tax incentives for outside companies to begin drilling operations.

Most importantly, keep a watchful eye on China.

I said in previous articles that China may be the next nation to join Canada and the U.S. in commercial shale development.

Natural gas production in China increased 9 percent in the first half of this year from a year ago, and Chinese energy companies are investigating fracking technology.

But China is also going through water shortages of its own and is currently focused on reducing pollution in its urban centers and producing clean drinking water for villages.

China may be the next country to join the shale gas craze, but I honestly believe India can beat China to the punch if officials act fast and develop an open policy that will encourage foreign investment.

Positive Side

India has some definite work ahead if it wants to engage in shale production, but it is still a new frontier for natural gas that could go places.

Indian demand for natural gas is expected to increase two-fold by 2017.

And there are native Indian companies like Gail (NSE: GAIL) and Reliance Industries that are purchasing shale assets abroad in order gain the necessary expertise to develop on a domestic level.

ONGC recently signed an agreement with ConocoPhillips (NYSE: COP) to learn from the energy giant about natural gas production.

Other Asian countries like Mongolia and China are also sending reps and fostering deals in order to learn the best techniques in shale extraction.

But India is one of the top tier nations that can back up a thriving shale industry, holding as much as 96 trillion cubic feet of shale natural gas, enough to supply the country’s energy demand for about 26 years.

If India makes full use of those 26 years while diversifying its power sources, the country’s energy makeup will be in great shape.


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