China: The Next Shale-Gas Superpower? | The National Interest

Shale gas sparked an energy revolution in the United States, helping end a reliance on imports and making the nation an energy superpower. Yet while China eyes its own shale revolution, the world’s largest energy consumer is seeing its production targets rapidly evaporate as it confronts enormous technological and market challenges.

Shale’s potential to deliver much-needed energy for China is obvious. According to the U.S. Energy Information Administration’s 2013 estimate, China has an estimated 31.6 trillion cubic meters (tcm) of technically recoverable shale gas resources, almost as much as the United States and Canada combined.

China has already invested more than a billion dollars in shale-gas exploration, completing more than eighty reservoir appraisal wells, including more than twenty horizontal wells as of 2013. Yet of the 117 billion cubic meters (bcm) of natural gas produced by China last year, only 0.2 bcm was from shale.

While domestic gas consumption has increased rapidly, production has lagged behind, hit by a lack of investment and pipeline constraints. China became a net gas importer in 2007 and since 2009, domestic gas production has expanded at an annual compound rate of 9.3 percent, well below that of demand, which has grown by 19.1 percent over the same period.

Under its 12th Five-Year Plan, China set a target of doubling natural gas in primary energy consumption to 8.3 percent by 2015, producing 6.5 bcm annually and as much as 60 to 100 bcm by 2020.

The move is part of a shift away from its heavy reliance on coal-fired power, which accounts for around 70 percent of energy consumption. Gas-fired power stations generate around half the emissions of equivalent coal-fired power stations, making gas an important part of the government’s push to clean China’s polluted cities.

Yet while China’s State Council has identified gas as a “pillar industry” to receive government support including tax breaks and subsidies, it has been forced to cut back on its targets.

Wu Xinxiong, director of China’s National Energy Administration, recently admitted that only 30 bcm a year would come on-stream by 2020, barely 1 percent of the nation’s energy needs, after exploration efforts proved more challenging than anticipated.

“The previous targets were more of a vague prospect, a hope. Thirty bcm is a more realistic goal,” a government source told Reuters.

Of the nation’s two biggest state oil companies, China National Petroleum Corporation (CNPC) and China Petroleum Corporation (Sinopec), only the latter has a commercial shale-gas operation in production. Sinopec expects production from its Fuling field in southwest Sichuan to reach 5 bcm by 2015, doubling to 10 bcm by 2017, but few other large gas fields are set to come online.

The reduced production target may also affect the ambitions of foreign companies in China, including Anton Oilfield. Royal Dutch Shell and Hess are the only two foreign firms to have secured production-sharing contracts, with most, including ExxonMobil and BP, barely progressing beyond studies.

The supply failures have led to increased reliance on imported liquefied natural gas (LNG), with China importing 18 million tons in 2013, compared to 3.3 million in 2008. With LNG imports up 29 percent so far this year, China has quickly become the world’s third largest LNG market.

Beijing has also accepted the need for higher gas prices to encourage investment. In 2013, the NDRC introduced the first nationwide gas-price increase in three years, along with a two-tier gas-pricing structure for existing and incremental supply.

“In essence, incremental supply above 2012 contract volumes will be priced in a range from $13-$15 mmbtu [million British thermal unit]. This should reduce the losses on oil-indexed imports, and encourage the flow of capital into domestic unconventional gas exploration and development,” ANZ Research said in a September 12 report.

Barriers to Development

Sunny forecasts of China’s shale-gas potential have been dimmed by the industry’s enormous technological, environmental and market realities.

Unlike much of U.S. shale, which was launched in the flatlands of North Dakota, Pennsylvania and Texas and buried under a few hundred meters to 3,000 meters, China’s shale basins are located in mountainous and difficult terrain, with vertical depths of shale deposits ranging from 3,000 up to 8,000 meters. Tectonic complexity makes large-scale drilling, including horizontal drilling and infrastructure, such as roads and pipelines, highly challenging.

Another constraint is a lack of the necessary water required for hydraulic fracturing or fracking, which has been crucial to commercializing U.S. shale gas. In 2011, China had a renewable water resource per capita estimated at only a quarter of the world average at 2,063 square meters a year.

via China: The Next Shale-Gas Superpower? | The National Interest.