China Steps up the Tempo to Develop Domestic Shale Gas Sources

by Stuart Burns on July 7, 2011

Style:    Category: Green, Product Developments

Natural gas holds a lot of promise for China. As a result, China’s development of the fuel has the potential to profoundly impact global prices. Natural gas has many advantages as a fuel source for a country desperate to reduce the pollution caused by generating power from coal. Natural gas produces much lower carbon emissions per KwHr of electricity than conventional coal fired power production. It also provides a stable base load to complement the variable supply of China’s massive wind power electricity generation. In addition, although China has become a major producer of coal, China also serves as the largest consumer. This has resulted in China needing to import thermal coal since 2009, driving world prices to unprecedented levels. Natural gas however, tells quite a different story. According to a recent FT article, China has reached near self-sufficiency, producing 85% of the gas it consumes and imports just 11% as LNG and 4% via pipelines from central Asia. But with gas demand expected to double over the next five years to reach 260bn cu mtrs, (making China the world’s third largest user after Russia and the US) some have questioned China’s ability to supply natural gas in sufficient quantities to meet a rise in demand.

Perhaps to hedge their bets, Beijing has invited bids for the first “unconventional gas drilling tender looking to mimic the success of the US in releasing vast supplies from shale and coal bed methane sources. Beijing may have drawn inspiration from a report by Wood Mackenzie last year which said Chinese unconventional gas could supply as much as 340m cu m of gas a day by 2030, potentially cutting the need for imports. A separate FT article quotes US Energy Information Agency estimates that China has larger shale gas reserves than the US. With surveying, however, currently in an earlier stage than the US market,  estimates appear less certain. Nor do all observers seem convinced China has the technological expertise, infrastructure or ability to ramp up shale gas exploration and exploitation quite so rapidly. China however, has proved time and again it can act as a fast follower, capable of poaching the technology and organizing the masses to achieve rapid development. Chinese firms have already invested billions in projects with Chesapeake Energy in the US and Shell in Australia, ostensibly because they consider them good long term investments but no doubt with an eye to learning the techniques for shale gas and coal bed methane exploitation.

The fall in US natural gas prices has dragged global gas prices down and strained the traditional relationship between oil and gas prices for many long-term contracts. If China’s demand over the coming years exceeded its ability to supply from domestic sources it could have the same profound impact as China’s demand for coal, oil, agricultural commodities and of course metals, driving up global gas prices. The extent to which the country can step up both its conventional and later unconventional supply sources has remained a topic of concern for energy consumers everywhere. Interestingly, Beijing may consider opening up future tenders to foreign drilling firms, a move that could increase reserves more rapidly than if left to domestic oil firms. Currently, domestic conventional gas sources remain low cost and plentiful but with China’s voracious appetite we can only guess what that might do for prices.

–Stuart Burns

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