China shale-gas drive appears
over-ambitious By Robert M
Cutler
MONTREAL - China seeks to produce
80 billion cubic meters per year (bcm/y) of
natural gas from shale rock by the year 2020,
according to authoritative reports of a draft of a
national plan, but it will be fortunate to get
one-third of that, according to a Bloomberg News
survey of experts.
The US Department of
Energy's Energy Information Administration (EIA)
estimates technically recoverable shale gas in
China at 36 trillion cubic meters (Tcm), while the
Chinese government Ministry of Land and Resources
unofficially puts the figure at 31 Tcm, of which
only 25 Tcm are actually susceptible to be
explored.
The ministry announced this week
that it will emphasize shale gas survey and
appraisal this year. The move follows the decision
of the State Council, or
cabinet, last month to designate shale gas as an
"independent” mining resource, opening up the
sector to private Chinese firms.
However,
none of these figures really takes into account
the actual geological situations of the resource
in different parts of the country and
corresponding constraints on its development. In
fact, the geology is different from in the US, and
the technical issues are more difficult.
For several years, Chinese energy
companies have been scouring the globe (or at
least North America, where the techniques are best
developed) in search of shale-gas technology,
including hydraulic fracturing ("fracking"), that
they can use for the domestic development of the
industry. In 2011, Chinese state-owned enterprises
invested in Canada nearly one-third of the almost
US$18 billion that they spent buying energy
companies.
Sinopec bought Daylight Energy
Ltd for about $2.2 billion, its largest foreign
acquisition of 2011, to get access to shale-gas
reserves in Canada. PetroChina was in talks with
Encana Corp to acquire the latter's Cutbank Ridge
assets until the price difference was seen to be
unbridgeable, whereupon the Chinese company took
its $5.4 billion bid off the table. Earlier this
year, PetroChina paid over $1 billion for a
one-fifth stake in a Royal Dutch Shell Plc
shale-gas project in western Canada.
Chinese forays have also naturally
extended to the US, where PetroChina announced a
$2.5 billion investment in new fields under
development by the US firm Devon Energy. According
to the Financial Times, the latter sum represents
$900 million cash and fully 80% of Devon's
development costs, for which Sinopec will acquire,
however, only a one-third stake. All of these
investments are intended to gain access to
shale-gas technology, in particularly hydraulic
fracturing.
As a result of the differences
from North American shale geology, however, it is
not clear how transferable the technologies will
be. Shale deposits in China are further down in
the ground than they are in the US, where shale
gas has become an important part of the country's
fuel supply mix. This fact along with the
increased complexity of the formations will
increase cost of recovery by itself. In addition,
"the mineralogy of the shale rocks in China is
primarily … non-marine, which means … [they] have
much [higher] clay content and are [less] easily
fractured," according to energy analyst Neil
Beveridge of Sanford C Bernstein & Co, as
quoted by Bloomberg.
China became a net
importer of natural gas in 2007. The result of
delay in developing the country's shale gas will
be a need to increase purchases from foreign
suppliers. At the end of last year, Turkmenistan
agreed to increase its exports to China from the
South Yolotan field that China is helping to
develop, from the previously agreed 40 bcm/y to 65
bcm/y. A 12 bcm/y pipeline is also under
construction from Myanmar, scheduled to enter into
service in 2013. Natural gas as well as oil was
also under discussion during Canadian Prime
Minister Stephen Harper's five-day visit to
Beijing this month.
China also has the
option for Russian gas from Siberia, through two
pipelines, each with a projected capacity of 28 to
39 bcm/y. However, the memorandum of understanding
with Russia over these projects was signed six
years ago, and many rounds of negotiations have
taken place, including at the highest level of the
respective political executives. Still, no
definite agreement has been reached, as
disagreements over price persist. Both sides drive
hard bargains, and there is no guarantee of a
final resolution. CNOOC and PetroChina have
already signed several long terms supply contracts
for LNG imports equivalent to almost 31 bcm/y with
Asian firms that source LNG from Australia,
Indonesia, and Malaysia. According to
Businessweek, the French firm GDF Suez has
estimated that China may need to import as much as
46 bcm/y natural gas equivalent of LNG by 2020,
although estimating Chinese demand a decade hence
is nearly as much art as science and estimates may
differ by a factor of two or even more, depending
on the methodology or lack of it. Still, there is
a prospective shortfall of significant
proportions, unless China suffers a "hard landing”
to its current still-dynamic growth.
Dr
Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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