China potentially could dictate terms as the fastest growing market in a world suddenly awash in potential oil and gas resources, speakers suggested during a discussion of energy and security in China and Pacific Asia at the Woodrow Wilson Center for Scholars.
That would put pressure on Russia to reconsider threats to cut off sales to European countries and other customers for political purposes since its potential new supplies may be too expensive to develop, especially if the US decides to aggressively export crude oil and LNG, they said on Sept. 17.
“The two big markets for growth will be the Middle East, which will consume its own oil and gas, and China,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California at Davis. “That let it extract terms from Russia leading up to the recent pipeline announcement, then go back to LNG suppliers and say they need to be more competitive.”
It also has lent money so aggressively to oil producing countries that Russia and Venezuela essentially are giving it crude to repay their debts, she said, adding, “It’s something Russia will need to consider, given its boldness in Europe.”
Putting out markers
Among other Pacific Asian countries, Japan is still recovering from the 2011 Fukishima nuclear power plant accident and becoming more dependent on LNG, observed Mikhal E. Herberg, research director at the National Bureau of Asian Research’s Energy Security Program. “I don’t think energy is a big piece of the China-Japan relationship, although Japan has a vital interest in controlling sea lanes coming through Asia,” he said.
Territorial disputes in the region tend to be 95% geopolitical, Herberg said. “It raises the stakes at the margin to the extent that you believe there are major oil resources in the South China Sea,” he said, adding, “All the countries are using energy to put out markers defining their territory.”
Australia and China’s relationship is being drawn closer together in the meantime because China’s energy market potential is so great, he continued. “Australia is going through a huge debate about whether its future relationship needs to be as strong as it has traditionally since China is closer and holds such promise,” Herberg said.
China’s shale gas potential is significant, but its development will depend on its ability to overcome a large number of variables and replicate the US success that was grounded in economic opportunity, a good existing transportation system, and other very favorable conditions, according to J. William Ichord, ConocoPhillips Co.’s vice-president of international government affairs.
“We’ve really only been in the shale gas business for about 10 years,” he said. “There’s been a substantial amount of experimentation to get the best yields and production rates. Seventy-five percent of the wells being drilled now benefit from pad technology.”
China’s basis for success lies in its having a lot of shale gas spread across the country, and its production contracts for conventional gas recovery having worked over the last decade, Ichord said. “We’re having discussions with the Chinese ministries about the flexibility which will be needed,” he said. “We believe a rolling operating development plan could help bring China’s shale gas on-line more quickly.”
Closer to conventional
Asked how this might work, the ConocoPhillips official explained that under a Chinese production-sharing agreement, a producer has to file an action plan. That’s not always practical in shale project, where the producer often learns as he goes along. “A rolling operating development plan would make a search for unconventional energy closer to a conventional strategy,” Ichord said.
Jaffe noted, “The US also has an interesting opportunity in its oil and gas exports. That gives us an instant platform to improve global oil and gas trade. Having a proactive global energy policy where countries don’t horde their reserves is a worthy goal. The irony is if the US exports more, China won’t have to develop as much of its shale. The need for Russian energy in Europe also would go down.”
Speakers’ responses varied when they were asked whether gas will begin to replace coal in China. “In the near term, it has an all-of-the-above strategy, for lack of a better term,” said Ichord. “The government has set targets for shale gas development in the 12th 5-year plan, and LNG imports have started to increase. But it’s all feeding into growing demand.”
Herberg said, “China understands now that it needs to move more gas into power generation. Its goal of 20 bcm/year is ambitious.”
Jan H. Kalicki, the Wilson Center’s regional and global energy issues leader, said, “If the US played a more aggressive role in promoting energy trade with China, it also would contribute to its environmental improvement.”
Jaffe added, “If China develops its shale, a lot of LNG which would have gone there would logically head to India. Its demand is much more commercial than China’s, which is more willing to pay top dollar to participate in resource developments in places like Myannmar. Middle East supplies will need to ask where they’ll align themselves.”