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    China Business
     Aug 24, 2011

China joins shale gas hunt
By Olivia Chung

HONG KONG - China should accelerate the pace of its exploration for shale gas and other unconventional natural gas to cut emissions and reduce its increasing dependence on imported fossil fuels, experts and industry players said.

China now relies more on imported oil than the United States. Its dependency ratio of foreign crude imports hit a record 55.2% in the first five months of this year, up from 55% in 2010 and 33% in 2009. The US's dependence on imported oil is 53.5%.

China's domestic apparent consumption of petroleum increased by 10.3% year on year to 198 million tonnes from January to May, according to the latest data provided by the Ministry of Industry and Information Technology (MIIT). The "apparent consumption" represents the sum of net imports and output and can be taken

as an index for the real oil consumption excluding inventory.

In the first five months of the year, the apparent consumption of crude oil increased by 8.5% year on year to 191 million tonnes.

China has been a net importer of oil since the 1990s, and its oil imports have risen sharply due to its strong economic expansion. Its own output of crude oil has averaged around 200 million tonnes annually in recent years, while oil imports last year came to 239 million tonnes, up 17.5% on a year earlier, according to the General Administration of Customs. Crude oil imports rose 11.3% in the first five months of this year from a year earlier to 107 million tonnes, according to MIIT.

The strong growth in both imported oil dependency and oil import volume raises concern for China's energy security, said Lin Boqiang, director of the China Center for for Energy Economics Research at Xiamen University.

"In recent years, the country's dependency ratio of foreign crude imports has risen three percentage points each year," said Lin, who expected China's dependence on imported oil would jump to 60% by 2013 and even to 80% by 2030.

"The nation's rising dependence on imported oil is threatening the country's energy security," he said. "Taking the talks on natural gas and crude oil between Russia and China as an example, if a country's oil import dependency reaches too high, the country would be put in a passive role. Even though Russia is not the main supplier of crude oil to China, production in parts of China will definitely be affected in case of a lack of its supply."

Talks between Russian gas giant Gazprom and China National Petroleum Corporation (CNPC) on the long-term delivery of natural gas through pipelines from Russia to China have lasted for five years without reaching a final agreement due to differences over pricing. Their aim is for Russia to supply 68 billion cubic meters of gas through two pipelines to China each year over a 30-year period.

To reduce dependence on imported oil, the government should stop up the pace of its exploration of unconventional natural gas such as gas in shale and coal-bed methane, Lin said.

Gas trapped in rock formations, or shale gas, is increasingly being exploited in the United States, where it is helped to reduce drastically that country's dependence on natural gas, much of it imported. Shale gas provides 23% of natural gas supplies in the US, compared with 4% in 2005, according to The Economist.

While shale gas is a clean fuel compared with oil or coal, large volumes of water - along with a stew of toxic chemicals - are required to be pumped into the surrounding shales, break them up (fracking) and drive the gas to the surface.

China has yet to make a full assessment of its shale-gas deposits. The US Energy Information Agency says China may hold 36.1 trillion cubic meters of shale gas reserves, about 50% higher than those estimated in the US, the next largest.

China may have 26 trillion cubic meters of shale-gas reserves, more than 10 times its proven holdings of conventional natural gas, a Ministry of Land and Resources official said last year.

China approved its first shale gas exploration tender in July, awarding two blocks in the Sichuan Basin to China Petroleum & Chemical Corp, or Sinopec, and a Henan provincial state-owned company.

Last year, PetroChina Co, the country's top listed gas producer and a subsidiary of China National Petroleum Corp (CNPC), started drilling two shale exploration wells in Sichuan province. PetroChina said earlier it aims to produce 500 million cubic meters of shale gas by 2015.

The complexities of shale gas extraction are encouraging Chinese companies to look overseas, particularly the United States, to secure technological understanding of what is involved. Given that China's shale development is only in its infancy, foreign technical support is urgently needed, according to Lin. "Through acquisitions or joint efforts with foreign industry players, China can acquire technology expertise, such as hydraulic fracturing, to speed up its development of shale gas," he said.

In January, CNOOC said it was investing US$570 million on buying into several shale oil and gas leases in the US owned by Chesapeake Energy Corp. Funding of two-thirds of Chesapeake's share of drilling and other costs will be covered up to maximum of $697 million, the two companies said.

Last November, CNOOC paid more than $1 billion for a 33% stake of Chesapeake Energy's oil and natural gas leasehold acres in the Eagle Ford Shale project in South Texas.

Though the auction in China for domestic shale gas blocks this summer was off-limits to foreign explorers, Chinese oil companies have entered partnerships with foreign gas explorers for work in the country.

UK-based BP has joined Sinopec in a joint program to cooperate in shale gas exploration and development in southwest China's Guizhou province. Sinopec has charted 2,000 square kilometers in Kaili in Guizhou province and 1,000 sq km in Huangqiao in eastern Jiangsu province, as potential cooperation blocks.

Sinopec, the country's second-largest oil company, plans to increase its unconventional gas production capacity to more than 2.5 billion cubic meters annually by the end of 2015, by speeding up its development of shale gas and coal-bed methane during the central government's 12th Five-Year Plan period (2011-15).

Unconventional gas resources such as shale gas may account for 30% of the nation's gas output by 2020, said Jie Mingxun, president of PetroChina Co's coal-bed methane unit, in May.

Li Xinmin, an inspector at the Ministry of Environmental Protection told Shanghai Daily that shale is usually in rocks deep underground and the ministry is looking at the possible environmental impact of the exploration. Water availability will also present one of the above-ground challenges.

Olivia Chung is a senior Asia Times Online reporter.

(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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