China's Shale Gas Ambitions: Possibility Or Pipe Dream?

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 |  Includes: CHIE
by: Emerging Growth

Summary

China has an ambitious shale gas production target of between 60 and 100 billion cubic meters by 2020, as outlined in its 12th Five Year Plan.

China’s cabinet released a detailed plan in September 2013 that aims to rebalance the Asian country’s energy mix so that coal, responsible for heavy pollution, accounts for less than 65 percent of the overall energy supply by 2017.

China’s spending in shale gas is in some cases four times as much as what the U.S. spends to develop its fields.

Despite official support from the Chinese government for increased natural gas consumption, little remains to be seen as far as shale development is concerned, the government seems more open to continued gas imports.

China has an ambitious shale gas production target of between 60 and 100 billion cubic meters by 2020, as outlined in its 12th Five Year Plan. The Asian Tiger, which is the world's largest energy consumer, is exploring the possibility of shale gas not only because of the environmental benefits that natural gas presents over coal, which China is heavily dependent on, but also because China holds the world's biggest reserve of natural gas in shale rock.

The State Council (China's cabinet) released a detailed plan in September 2013 that aims to rebalance the Asian country's energy mix so that coal, responsible for heavy pollution, accounts for less than 65 percent of the overall energy supply by 2017; down from the current 70 percent. Natural gas is thereby expected to play an increasingly pertinent role in China's overall energy mix, explaining the ambitious production targets the Asian Tiger has placed for itself. Shale gas development is seen as a good alternative because in addition to the quality of being cleaner than coal, it is naturally found in abundance in China. Experts say that domestic shale development could reduce reliance on gas imports, allowing China to grow its economy more sustainably.

A recent study by Bloomberg New Energy Finance showed that China's spending in shale gas is in some cases four times as much as what the U.S. spends to develop its fields. The mere fact that China is outspending the U.S. (which is ten years ahead of China in shale development) suggests that China's shale ambitions could materialize.

Serious Doubts

While there have been a slew of reports outlining the economic and environmental benefits (relative to coal) that shale gas could present for China, the possibility of actually developing shale gas in China has on several occasions been thrust into serious doubt.

In addition to the expected protests by residents who worry about the environmental impacts of fracking (despite being cleaner than coal it does use mammoth volumes of fresh water), there is also the lack of regulation, pipeline monopoly, as well as state-set gas prices that act as prominent sticking points to shale development in China. These factors are disincentives because of their potential to significantly add on to costs, especially after considering that shale investment is comparatively costlier than investments in conventional plays. This plausibly explains why China has drilled just about 100 shale gas exploration wells over the past several years, while the U.S. manages 8,000 annually. This is in spite of the report from Bloomberg (earlier mentioned) suggesting aggressive shale spending by China.

Despite official support from the Chinese government for increased natural gas consumption, little remains to be seen as far as shale development is concerned, and instead, the government seems more open to continued gas imports. As a direct validation of this assertion, Russia and China recently signed a 30-year, $400 billion deal that will see Russian state-owned Gazprom provide 38 billion cubic meters of gas annually to China. This move signals Russia's shift to Asia amid escalations in tension between the former and Western Europe, which may soon look for alternative sources of gas following Russia's deal with China.

As relations between Russia and Western Europe continue to fester over their positions on Ukraine, China will emerge as a greater trading partner with Russia, increasing the likelihood that more Russian natural gas will flow through China's pipelines. In such a scenario, China's shale development ambitions may be compromised owing to the availability of swift imports from an increasingly friendly trading partner, Russia.

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