Not just a pipe dream

Shale gas will create hundreds of thousands of jobs and solve the problems of energy-intensive industries in China, believes Chen Weidong, chief energy economist of China National Offshore Oil Corporation (CNOOC).

Pointing to the amazing shale gas run in the US that saw the country sitting on huge surplus stocks of natural gas, Chen says the real gains are the massive reductions in carbon emissions — greenhouse gases — that the US has achieved in the last five years.

China, the world’s biggest energy user, is also one of the nations with the largest reserves of shale gas. According to government estimates, China has explorable shale gas reserves of about 25.1 trillion cu m. It means based on current gas consumption, there are enough gas stocks to last for the next two centuries.

Shale gas is seen as an attractive proposition as it offers abundant clean energy or energy with lower carbon intensity, an important aspect when it comes to fixing national goals. From a consumer perspective, it is worth pursuing as the long-term prospects make it an extremely viable proposition.

But till date, China has not started commercial production of shale gas, unlike the US where it has become a major and plentiful energy source and made the nation more or less self-sufficient in its energy requirements.

There is now a growing urgency in Beijing to encourage the development of unconventional energy sources as it believes such steps are essential to help reduce carbon emissions and costly gas imports.

Shale gas remains an integral part of the overall energy strategy. The government has outlined a plan that will see China producing 60 to 100 billion cu m of natural gas annually by 2020 from shale sources.

To further encourage the key players within the shale gas industry, China has announced its intentions to open up some shale gas blocks for private companies. That in itself is a major policy change as the 50 trillion yuan ($7.8 trillion) industry was till now mostly restricted to State-owned enterprises.

Experts agree that the industry is set to blossom in China, considering that it has a treasure trove of resources.

“I have great expectations of China’s shale gas prospects. We have the resources and the market. Shale gas certainly has the potential to be big in China. But I am not overtly optimistic about the future development of the sector,” says Chen, one of China’s foremost experts on unconventional energy.

He says the industry has been evolving indecisively and has still not got the right priority. He finds the attitude surprising, considering that China will face more challenges to meet energy requirements in the wake of rapid urbanization and development.

Natural gas is the practical solution to China’s long-term energy requirements, as other unconventional sources, like wind and solar power, have proved to be expensive propositions, Chen says.

Though China has the largest installed capacity in wind turbines and is the largest maker of solar panels in the world, it is not prudent of the energy-hungry nation to solely focus on renewable energies, experts say.

Energy demand is expected to jump sharply by 2030, when China becomes the largest economy in the world, experts say. According to the BP Energy Outlook 2030 released in January, China’s energy consumption in 2030 will be more than the combined demand of the US and Europe.

During the same period, the energy deficit between China’s own production and consumption is expected to jump six-fold over that of 2010, according to the report. China already imports more than 55 percent of its oil requirements and 20 percent of its natural gas requirements. The over-reliance on costly fuel imports will impact long-term growth and development prospects, experts say.

Though coal will continue to be the major source of fuel in China, there is now a growing demand to shift from the carbon-intensive fuel. Beijing, for instance, plans to replace all of its coal-fired power plants in the central areas of the city with natural gas power plants this year to cut down emissions. Many other cities are expected to follow suit.

Experts from across the world agree that natural gas is the transitional energy the world will largely use as it seeks to move away from old and costly fossil fuels to cheaper and environmentally friendly renewable energy.

According to the International Energy Agency (IEA), natural gas will overtake coal to become the second-largest primary fuel in the world by 2035 after oil.

China has already set a goal of doubling its share of natural gas in the overall energy consumption to 8 percent by 2015. However, the growth in production has not been in tandem with the growth in consumption.

The country has been a net natural gas importer since 2007. According to IEA’s projection, China is likely to double its natural gas imports over the next five years. During the same period China will also become the third-largest natural gas importer in the world after Europe and the Asia-Oceania region.

“No country wants to be reliant on other nations for energy supplies. The reasons for this are both economical and political,” says Howard Rogers, director of the Natural Gas Research Programme at the Oxford Institute for Energy Studies in Oxford, UK.

Expensive energy imports put nations in a vulnerable position, especially when there is political turbulence across the world, says Youn-kyoo Kim, associate professor of International Studies at the Seoul-based Hanyang University in South Korea.

“The US success in shale gas has made it less reliant on imports from the Middle East. Like the US, if China achieves a shale gas revolution it will also be less reliant on costly gas imports from Russia and the Middle East. It could pave the way for a new cooperation mechanism in Northeast Asia,” Kim says.

The shale gas revolution has helped the US become the leading nation in terms of natural gas stocks and cut its oil imports from 60 percent of total consumption in 2005 to 46 percent. Over the next five years, the US is also set to be a leading exporter of natural gas.

“I think China is very impressed by what has happened in the US shale sector and would like to replicate that success. However, it will be some time before China can achieve significant volumes of shale gas output,” says Rogers.

It took the US more than 100 years after accidentally finding shale gas, to find an affordable way to extract the natural gas from shale rock for commercial production.

China, which started focused research on shale gas only in 2009, is looking to shorten the long march into a short run.

According to China’s first shale gas development plan released in March, the country is set to increase its currently next-to-zone production to 6.5 billion cu m a year by 2015, and then to 60-100 billion cu m a year by 2020.

The plan is quite ambitious as conventional natural gas production in China last year was just about 100 billion cu m. By 2020, the government expects shale gas consumption in China alone to be 100 billion cu m.

That is easier said than done.

Several countries from Asia and Europe have in the past tried to emulate the US success in shale gas. But none of them have been quite as successful.

A ‘new baby’

Despite Poland’s strong desire to develop shale gas and to reduce its dependence on gas imports from Russia by offering a number of mining exploration rights to foreign companies, it has not achieved much success. Global oil major ExxonMobil had earlier this year said it was ending its search for shale gas in Poland after two wells failed to yield gas flows substantial enough to make commercial development viable.

Andrzej Pieczonka, first counselor at the Polish Consulate in Shanghai, says shale gas is just like a new baby. “Everybody is happy to have a new baby, but how to raise it is often a major problem,” he says.

It took the US many years to develop and apply the current technology though the companies were well aware of the shale gas reserves when they were drilling and exploring for conventional oil and gas reserves.

China drilled its first test well for shale gas in 2010, and had 63 test wells in operation by the end of April. In contrast, the US has more than 80,000 shale gas wells in commercial operation.

Li Yuxi, a senior researcher at the Ministry of Land and Resources, says that though the early results from most of the test wells are optimistic, the outcome is still not rosy enough to ensure profitable commercial production.

Whether an investment is profitable or not depends largely on the cost and returns from the project. According to Li, the cost of drilling shale gas in China ranges from 20 million yuan to 100 million yuan, depending on the geological location. The average cost in the US is $3 million. “We are still in the early stages of shale gas development in China. We need to learn more about it, no matter what the cost is,” Li says.

However, for investors interested in shale gas, cost does matter. With such high cost and an unpredictable gas price in the future, the risk of investing in shale gas is high, says Li Jun, board secretary of Zhongtian Urban Development Group.

Li often travels across China to attend conferences, seminars and summits to gain information about shale gas.

The real estate company from Guizhou province with assets of more than 15 billion yuan is contemplating an entry into the shale gas sector.

“We can handle the risks. But I am not sure whether many of the smaller private companies have the requisite funds to drill shale gas wells,” Li says. “It is not like you drill just one well and start making money. In this business you need to drill a lot in order to find the one well that can yield abundant gas.”

Li adds that small and medium-sized companies have fueled the shale gas revolution in the US. But with more investment in the development of the sector, the cost is expected to drop.

Tougher task

Ye Dengsheng, general manager of a downhole service company at Chuanqing Drilling Engineering, affiliated to China National Petroleum Corporation which has drilled 18 shale gas wells in China, says the extracting cost will decline with the development of better management techniques.

His Chengdu-based company spends about 60-70 million yuan on one well. “We plan to further hone our skills and improve efficiency. This will help reduce overall costs for each well to around 40-50 million yuan,” he says.

According to Ye, drilling shale gas is much more difficult than conventional natural gas. “It requires more machinery, equipment and workforce. I think we’ve already mastered the required cutting-edge hardware for shale gas development. However, from a software perspective, there are still lots of things that need to be done,” he says.

It will take a long time for China to “re-discover” and “re-invent” these approaches. However, it is still unclear whether China will develop a framework that will allow US companies sufficient profit incentives to transfer the technology to Chinese companies.

Most of the world’s biggest oil companies, including Exxon Mobil, Chevron, BP and Norway’s biggest energy conglomerate Statoil, are participating in China’s shale gas development. Royal Dutch Shell is the first and only company that has signed a production-sharing contract with China National Petroleum Corp, the nation’s biggest oil company.

However, they have limited their involvement to the minimum by setting up joint studies and joint assessment on shale gas wells with their Chinese counterparts.

One of the reasons why foreign companies are not too enthused by the shale gas prospects in China is that they are not allowed to participate in bidding for shale gas blocks directly.

“The biggest attraction for them is a large stake. If they are given only 10 percent or 20 percent of the blocks, that is not good enough for them to make money,” says Adi Karev, global head of the oil and gas practice at consultancy firm Deloitte.

Karev adds that oil companies are not short of money. In fact, seven out of the top 10 global Fortune 500 companies are in the oil and gas industry.

There are other regulatory hurdles, says Karev, though there are lots of potential gas reserves in China.

Chen Weidong from CNOOC says the US shale gas sector saw overseas investments of more than $23 billion between 2009 and 2011. Of this, at least $4 billion came from China’s State-owned enterprises.

Industry experts say the global outreach moves of these enterprises are not only for gaining insights into shale gas development but also for profit.

CNOOC has recently agreed to pay $15.1 billion to acquire Nexen, the Calgary-based oil and gas producer, whose assets include shale gas. It is the biggest overseas acquisition by a Chinese company.

PetroChina signed an agreement in February to purchase a 20 percent stake in Shell’s Groundbirch gas assets in Canada.

Sinopec has decided to invest $2.2 billion for a third of the US oil and natural gas producer Devon Energy’s interests in five developing fields.

Sinopec is also reported to be in talks with US gas producer Chesapeake Energy for its multibillion-dollar shale gas assets.

“Between 2009 and 2011, China’s investment in the shale gas sector was less than $1 billion,” Chen says.

“If we want to achieve the production target of 6.5 billion cu m a year by 2015, we need to invest at least $20 billion,” Chen says, adding that shale gas development in China needs more than just rhetoric.

With the second auction of shale gas blocks coming up in China, there is bound to be a frenzy of activity among global companies to grab a share of the pie. Some 70 companies have evinced interest in the bidding process, according to Ministry of Land and Resources sources.

Foreign companies, however, are not allowed to participate in the bidding directly. They can team up with Chinese companies that win the bid, provided their stake is no more than 49 percent in the joint venture.

Despite all the risks, Karev from Deloitte still considers the Chinese shale gas industry to be an “attractive proposition”.

“The reserves are here, so is the market. It is a perfect combination,” he says. “There is a lot of money to be made in China. Despite the risks, companies want to be involved in a large playground like China. So they will want to get in, but with baby steps.”

mengjing@chinadaily.com.cn