China: Shale Gas Enigma

The People’s Republic of China is believed to be one of the most intriguing components of the future global shale-gas equation, and this development is being driven by Beijing’s growing need for cleaner fossil fuels. Beijing urgently needs to reduce the share of carbon-intensive fuels in its energy mix in order to meet growing energy demand and prevent further deterioration of the domestic environmental situation.

Nuclear energy is still an option, but it would not represent more than 5% of the national energy mix. In this situation, natural gas seems to be a realistic option. However, China’s conventional gas reserves, estimated at 2.8 trillion cubic metres, are insufficient for the country’s energy-hungry economy, with annual natural gas consumption expecting to reach 300 billion cubic metres per year by 2020. 

The country might have to rely, not only on imports, but also on domestic unconventional gas production and China’s National Petroleum and Chemical Planning Institute (NPCPI) predicts unconventional gas production to reach 30 billion cubic metres/year by 2020.

There is a significant resource base for these initiatives. In April 2011, the US Energy Information Administration estimated China’s shale-gas reserves at 36 trillion cubic metres in addition to the other, less significant, non-conventional gas deposits such as coal bed methane (CBM) and ‘tight gas’. In June 2011, Chinese authorities launched its first shale gas development tenders, but the industrial production is not here yet.

However, China is already producing more than 2 billion cubic metres/year of CDM and this is expected to reach 10 billion cubic metres of annual production by 2020. Both Chinese and foreign companies are already present in the domestic non-conventional gas market. PetroChina, responsible for 75% of China’s domestic natural gas production is the top national player in this field. Coal companies, such as the China National Coal Group, are present in the CBM production. Sinopec plans to get active both in CBM and shale gas. European energy companies are visible as well. For example, Shell is associated with the CNPC in the tight-gas development project, BP works on shale-gas exploration in the partnership with Sinopec, and Total has a product-sharing agreement with PetroChina to develop non-conventional gas reserves in the Inner Mongolia region.

Shale gas production is still less developed than other unconventional initiatives, and its success would be conditioned by political will, public acceptance, economic costs and technological capacities of Chinese companies. The political will is in place – in November 2009, President Obama met with President Hu Jintao to discuss the possibility of strengthening US-China co-operation on clean energy and unconventional gas production and later invited China to join Global Shale Gas Initiative (GSGI). The GSGI is a US State Department programme created in April 2010 to promote global production of shale gas as an environmentally friendly fossil fuel and help other countries to identify and safely and economically develop their unconventional natural-gas resources.

Chinese companies still have a lot to learn about becoming new leaders in unconventional natural-gas production. Most of the relevant expertise and technological capacity is still concentrated in the US, which is forcing Beijing to increase its presence in the North American market and initiate closer technology co-operation with Washington. In October 2010, China’s energy giant China National Offshore Oil Corporation (CNOOC) bought a $1.1 billion 33.3% interest share in Chesapeake Energy’s Eagle Ford Shale project in Texas and in January 2011, CNOOC agreed to buy 33.3% stake in Chesapeake's projects in Colorado and Wyoming for $570 million. This deal has been a success, especially after Unocal's failure, but the true goal of the step is to learn quickly how to economically produce shale gas.

We can also assume that, on average, the public resistance and environmental concerns regarding shale gas production in China would be less intensive than in Europe and even than in the US. Unless proven extremely damaging to water quality, moderate shale gas production would have a better public reception, taking into account the worsening ecological situation and security of supply concerns, even if the low full cycle carbon footprint of the shale gas still remains to be proven.

Last but not least – the future of the shale gas in China would be definitely decided by its production costs. If the costs would be comparable to the prices for imported LNG or pipeline gas, the unconventional production in China will go ahead even if there are different estimates regarding the share of unconventional gas in the domestic natural-gas production.

Wood Mackenzie also believes that shale gas is already “the major growth story in China”, but massive shale gas projects. will face certain limitations linked to the complexity of geological formations, high production costs, technological imperfections, low outputs of the test wells, density of population and increased pressure on already scarce water resources, which would put additional upwards pressure on the domestic global foodstuff prices, potentially causing further global turmoil and instability. Most of the recent revolutions in the Arab Middle East are directly or indirectly linked with the ‘food crises’ and internal stability is of paramount importance for the Chinese government.

Danila Bochkarev is an EastWest Institute fellow