Commentary: China’s Shale Gas Ambitions Still Face Massive Hurdles (fuelfix.com)

image01 (7)China is still pressing ahead with its shale gas ambitions though numerous hurdles continue to hinder those goals. Shale gas is supposed to boost the nation’s natural gas supply which is in dire need. China today draws about 4 percent of its energy needs from natural gas and more than 70 percent from coal. The coal figure is one that the West has not experienced since the nineteenth century.

With abysmally bad pollution from coal particulates, the country’s National Development and Reform Commission’s (NDRC), two years ago decreed that by the year 2020 the natural gas contribution to the energy mix should increase to 10%. This is an enormous threshold to climb.

From the 3.3 Tcf per year of natural gas consumption, the figure should be escalated to as much as 12 Tcf per year by 2020. The incremental demand would be three times of the total export capacity of Australia or Qatar. The likelihood of such natural gas influx from overseas is slim. Thus, domestic shale gas has to be marshaled for any hope to meet the NRDC’s ambitions.

Last week a source at the NDRC’s Energy Research Institute said China’s third auction for shale gas block exploration rights is set to start soon, Shanghai Securities News reported on Friday.

“The process will start at the end of this year, at the earliest, with the results released next year. The blocks are likely to exceed the total of the past two rounds,” the NDRC source said. The latest round comes amid China’s attempt to bring record high air pollution under control by promoting natural gas usage and diversifying the country’s energy mix.

Wang Zhen, deputy head of the China University of Petroleum, said heavy air pollution in many cities and the government’s policy of energy structure adjustment will drive up demand for natural gas, prompting vehicles to convert from gasoline and diesel driven engines to those that use natural gas.

Yet, news of air pollution in China is nothing new and stories of frustrated Chinese citizens battling the government over this problem have become commonplace.

Not only does the corresponding civil unrest threatens the Chinese Communist Party’s stability, but the health problems associated with pollution in China also causes disease, pre-mature death and is a drag on economic growth. Some reports estimate that pollution in China costs the economy between 8% and 12% of GDP annually. However, it’s a problem that Beijing is now trying to address.

On September 12, China’s State Council released the “Action Plan for Air Pollution and Control.” China Briefing said that the plan puts forward the “toughest-ever measures to combat air pollution in the country.”

The Action Plan was established for six municipalities, provinces and regions, including Beijing, which needs all the help it can get. On October 6, local media reported that hazardous smog returned to the city and the surrounding region during the weeklong national holiday, which ended the following day. The South China Morning Post said choking smog returned four days after a dangerous smog alert was lifted.

Learning from American ingenuity

China held its second shale auction in October last year but it received mixed reviews due to the complexities of developing its shale resources. Though 83 companies placed bids, even more dropped out, expressing concern about high extraction costs for the hard-to-reach gas.

In June 2011, China’s held its first shale tender when six state-owned companies bid on four blocks in Chongqing municipality and Guizhou and Hunan provinces. Foreign companies were excluded from this first auction.

IHS vice chairman Daniel Yergin said on Friday that surging shale energy output in recent years in North America can also happen in other places, including China. He added that Chinese energy companies are learning the necessary technologies from their American counterparts. That’s an understatement. China is scrambling to acquire American oil and gas technology, mostly through recent business deals.

China has come a long way since 2005 when US political pressure forced Chinese oil major CNOOC to abandon its efforts to acquire California-based energy company Unocal. This July, CNPC’s publically listed subsidiary PetroChina and New York-based Hess Corporation signed a contract for onshore unconventional exploration in the Malang Block of the Santanghu Basin in North West China.

A Hess spokesman said the agreement “builds upon Hess’s unconventional experience in the Bakken and Utica Shale plays. Since the beginning of last year, 18 of the top 50 wells in the North Dakota portion of the Bakken have been Hess operated, Bakken Magazine reported.

One of the most noteworthy deals between a Chinese oil major and an American energy company was inked in 2010 when CNOOC invested $1.3 billion in Chesapeake Energy’s shale blocks in Wyoming and Colorado. A few months earlier CNOOC agreed to pay $1 billion for over a third of Chesapeake’s Eagle Ford oil and gas project in Texas, with another $1 billion development promise. Likewise, earlier this year, China’s largest oil major Sinopec announced it was investing $1.02 billion in a 50-50 joint venture with Chesapeake in 850,000 acres in the Mississippi Lime shale in northern Oklahoma.

However, problems remain for China’s shale producers. The US Energy Information Administration (EIA) said the first horizontal shale well drilled by PetroChina, the company most actively involved in exploring shale in the China, needed 11 months to drill compared with the usual two weeks for North American drilling. UPI, quoting Caixin News, said in the first half of the year China had 56 shale gas wells in the exploratory phase, but only 24 were producing gas.

Zhang Dawei, a director with China’s Ministry of Land Resources, said the shale industry in China is facing enormous cost pressures and the speed of exploration has been slower than expected, while Reuters said in March that China’s dream of a US-style shale gas boom was running further off-track.

After China’s second shale auction last year, Breitling Oil and Gas CEO Chris Faulkner toldEnergy Tribune that the hurdles for the China’s shale sector included lack of pipeline infrastructure, government controlled prices, lack of knowledge, equipment and experience to perform deep horizontal drilling and fracking. Also tough geological conditions have to be added into the equation. These problems remain unsolved.

In light of these factors, China’s shale goals will take much longer to come to fruition. Daniel Yergin told Xinhua that China has great potential for shale gas but it will take perhaps five to 10 years to develop due to lack of infrastructure and logistic capabilities. Neil Beveridge, a senior energy analyst at Sanford Bernstein in Hong Kong, said, “Gas is the future for China, but it’s the next decade when shale will start to flourish.”

Is five or even 10 years too long to wait to achieve Beijing’s twin goals of reduced air pollution and maximized natural gas production? Only Beijing policy makers and the Chinese populace can answer these questions.

Michael Economides is Editor-in-Chief of the Energy Tribune