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China’s Nascent Shale Gas Industry Gains Momentum

The shale gas revolution that has captured the media’s attention worldwide is also spreading to China, a major natural gas importer. Now the Middle Kingdom is on the verge of its own energy boom and wants to duplicate North America’s success and meet a significant part of its own fast growing energy needs.

Until recently, China had little incentive to develop its natural gas resources, either conventional or non-conventional. China was natural gas self sufficient until 2006 when it started importing LNG. By the next year, China’s natural gas consumption increased 23.8 percent and attained 69.5 billion cubic meters (bcm). Since then China has become one of the world’s top countries in terms of natural gas consumption. In June the International Energy Agency (IEA) released a report stating that global demand for natural gas will likely grow 17 percent over the next five years while Chinese consumption doubles. China’s demand for natural gas should expand 13 percent a year through 2017; US consumption is projected to also grow at 13 percent while Europe’s demand is forecast to grow at 7.9 percent, the report states.

“Asia will be by far the fastest growing region, driven primarily by China which will emerge as the third largest gas user by 2013,” the IEA report said.

In the last few years, China has tried to meet its rising gas demand by increasing investment in its natural gas infrastructure, including building the West-East Pipeline from western China to the eastern and southern parts of the country. They have invested in the Central Asian Pipeline to transport 30 bcm of gas from Turkmenistan, via Uzbekistan and Kazakhstan. They are also investing in a gas pipeline from Myanmar. China currently has four LNG terminals in operation with several others in the planning stages.

But the best news for China’s energy sector came earlier this year. In March, the Chinese Ministry of Land and Resources announced that China has 25.08 trillion cubic meters (tcm) or (886 trillion cubic feet) of exploitable onshore shale-gas reserves. The resources are part of an estimated 134.42 tcm of total reserves of the gas in the country. Shale gas has been discovered in 880,000 square kilometers (340,000 square miles) of exploration blocks that contain 15.95 tcm of the fuel that can be extracted.

Since the March announcement, China’s shale gas rights have opened for bidding. In May, Xinhua news agency and the China Daily newspaper, both official mouthpieces for the Communist Party, reported that more than 200 domestic companies registered for the country’s second auction of shale gas exploration rights. China’s Ministry of Land and Resources however later denied the report’s accuracy, claiming that the figure was “greatly exaggerated.” But the fact remains that China’s shale gas industry is now open for business, even though the number of companies bidding may be in dispute.

However, China has excluded foreign firms from bidding in its second tender for shale gas blocks except for a deal between Royal Dutch Shell and China National Petroleum Corporation that will develop shale gas blocks in the southwestern province of Sichuan.

Clearly, the shale gas disclosure is welcome news for such an energy deficient country as China. However, it’s still not time to celebrate in the streets of Beijing, Shenzhen and Shanghai.

To date, China has never produced shale gas commercially and several challenges must be meet before it can do so. According to Chinese energy experts, tough geographical conditions, lack of pipeline infrastructure and lack of exploration technology are the main hurdles to be met for China’s fledgling shale gas industry. Many claim that Chinese gas is buried deeper, and the formation age is older than shale deposits in the US.

Since much of the technology for shale gas extraction is from the US, China will either have to pay American firms for this expertise, look for partnerships with foreign firms to acquire the technology or develop it themselves, which could be a drag on its shale gas development.

Recently, a senior Chinese official acknowledged these limitations. On June 25 the China Daily reported that Liu Tienan, deputy head of the National Development and Reform Commission, called for the country to speed up mass production of shale gas with its own technologies to ensure adequate energy supply.

“Efforts must be made to achieve early breakthrough in the appraisal, exploration and development of shale gas resources, as well as to come up with measures to ensure environmental safety,” Tienan said.

Other challenges facing China’s nascent shale gas industry are governmental, including the need to develop a business model for the industry, as well as the even larger problem of water resource management. To begin to meet the governmental challenge, Chinese media reported in June that government departments are working to roll out beneficial policies such as tax and fiscal incentives to encourage shale gas development. However this takes time to formulate and implement.

Yet the larger problem on the horizon for China’s shale gas ambitions may be one of water supply. Fracking is water intensive, and will be problematic for China’s already dwindling water resources. From 2000 to 2009, total water reserves in China dropped 13 percent. According to research by The World Economic Forum many countries are already extracting groundwater faster than it can be replenished (Mexico by 25%, India by 56% and China by 25%.)

Last year, in China’s latest draft of its new 12th Five-Year Plan, the government set new targets on energy intensity in order to spur efficiency and conservation measures. But it also envisions record high levels of water use, which is expected to rise to 620 billion cubic meters (163 trillion gallons) by 2015 – up from 599 billion cubic meters (158 trillion gallons) in 2010, and as much as 670 billion cubic meters (177 trillion gallons) by the end of the decade. How this plays out in regard to the country’s shale gas future remains to be seen.

Liu Yijun, a professor with the China University of Petroleum summarized China’s shale gas future on Monday in an interview with Xinhua. He said that China’s shale gas development is still in a “primary stage, and has a long way to go towards mass commercial use.”

Yet the nation’s insatiable appetite for energy, its robust economy and its distinct drive and self-determination dictates that this story is one that is just starting to unfold and will gain momentum in the months and years to come.

Energy Tribune, 10 July 2012