China's Shale Gas Dream

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As Anthony Fensom’s recent article on the U.S. underscores, knowledge of the vast potential of “unconventional oil and gas” has been spreading rapidly in recent years.

But, as Pacific Money has noted before, North America is not the only potential benefactor of this trend. In fact, China is believed to hold the world’s largest reserves of shale gas, with the Ministry of Land and Resources estimates the country has134 trillion cubic meters of shale gas with 25 tcm of this recoverable.

Coincidentally, China this week announced that 16 companies had won a second round of bidding to explore 19 shale gas blocks around central China in Henan, Hubei, Hunan, Guizhou, Jiangxi and Zhejiang provinces, as well as in the Chongqing area. The successful bidders were all domestic—14 state-owned firms and 2 privately-owned ones — and have agreed to invest 12.8 billion yuan (U.S.$2 billion) over the coming years.

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Given the limited extraction capability of Chinese firms, this will exacerbate the already immense challenges China faces in extracting the natural gas and bringing it to market.

These challenges are among the factors that have caused China to fall behind its own shale gas targets. Last year the National Energy Administration announced the goals of producing 6.5 billion cubic meters of shale gas annually by 2015 and between 60 and 100 billion cubic meters by 2020. But with China still not producing shale gas commercially the 2015 target seems increasingly out of reach. Besides this latest auction Beijing has announced subsidies to shale gas producers as a means of jump starting the industry.

Also working in China’s favor is the fact that much of its suspected shale gas reserves are located relatively close to population centers along the coastal areas. This should lessen the burden Beijing faces in building the necessary infrastructure to bring extracted shale gas to markets.

Still, the United States and Canada are years head of Beijing in terms of their ability to extract and transport shale gas. As British Petroleum (BP) noted in its recent report, although Asia is estimated to have more shale gas reserves than North America, extraction and above ground factors mean that “North America will continue to dominate production” through 2030, while the “pace of development elsewhere is likely to be measured, given the lengthy checklist of factors required for development of shale gas.”

For example the U.S. already has more than 210 natural gas pipelines stretching across 300,000 miles and reaching almost every major market in the country. By way of comparison in 2010 China had just 22,400 miles of natural gas pipelines and the government expects this to increase to just 62,100 miles by 2015.

As a result, BP expects that China’s gas production will grow at over 6 percent annually through 2030 with 46 percent of this growth coming from shale gas and coal bed methane (CBM). By that time BP expects shale gas and CBM to account for 63% of North America’s gas production.

Other challenges will also have to be overcome if China is to stand a chance at realizing its own shale gas boom.  Aside from the lack of pipelines and mid-to-downstream infrastructure, these include a lack of storage capabilities and a non-market driven pricing scheme which discourages the high level of investment necessary to achieve shale gas extraction.  Indeed, energy producers in China often end up squeezed between government capped prices on the market and varying production costs – in effect subsidizing consumers. Furthermore, China’s relative lack of progress so far means that certain geological factors – such as more difficult to exploit deposits or lack of water required for extraction – remain less known.  Of course, with heavy state owned enterprise (SOE) influence in the sector, as well as an abundance (for now) of cheap credit, not all of these problems are necessarily insurmountable.

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