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We wrote an article on the booming natural gas/LNG markets in Asia, were prices are up to four times those in the US. The main players are Qatar and upcoming Australia, especially now that Indonesia and Malaysia are significantly reducing exports -- and might become net importers, as it happens.

Australia and Qatar have very different positions. In Qatar, the gas is near free, as they have very productive fields and often produce natural gas condensates and liquids as valuable byproducts, which reduces the cost further.

In Australia, the up-and-coming big exporter, the gas is largely unconventional (coal seam gas) or offshore (like the giant $50B Gorgon project), and therefore quite expensive. How expensive can be gauged from the figure below. Qatar is the cheapest producer, Australian projects like Pluto and Gorgon are among the most expensive:

Most of the gas goes to Japan and Korea, still by far the biggest importers. But others are following:

Thailand and Singapore will shortly commission their first LNG-receiving terminals, to be followed by Indonesia, Malaysia, Pakistan, Sri Lanka and possibly the Philippines. Within five years nearly all Asian countries could be importing LNG and we are seeing a similar picture in Europe, South America and the Middle East. Global LNG receiving terminal capacity was 350 million tonnes in 2005, 600 million tonnes in 2010 and could reach 950 million tonnes in 2015. [BBC]

You can see here how the Chinese oil and gas companies have been busy locking in supplies, much of it in Qatar and Australia, almost 40MTPA in total. But the bonanza of LNG exports to China could be dented by the development of domestic gas in China.

The Chinese are also trying to develop their domestic gas. The Guardian reports how the authorities want to wean the economy off coal and triple the use of natural gas. The aim is that it supplies 10% of the country's energy needs by 2020. Most of the increased domestic gas will come from coal-seam (coal-bed methane) gas, but shale gas will be 12% of domestic gas supply by 2020.

China already has considerable coal-seam gas production, but many hope they will be able to reproduce the US shale gas development. In April this year, the first horizontal well was drilled in Chinese shale gas properties in Sichuan. The optimists, like Ming Sung, Asia representative of the Boston-based Clean Air Task Force and an advocate of closer energy links between China and the US, argues it's a game-changer, and that China can learn a lot from the US experience with shale gas.

And there seems to be much more reason for optimism: A global shale gas study released this month by the US Energy Information Administration said China's technically recoverable shale gas reserves were almost 50% higher than those of the #2 nation, the US.

The energy potential is enormous. The ministry of land and resources calculates the size of shale gas reserves at 26 trillion cubic meters – more than 10 times the country's known holdings of conventional natural gas

But the Chinese have little experience with how to get that gas out, which is one reason they are interested in taking positions in American firms which have that experience. There were already deals between PetroChina (NYSE:PTR) and Encana (NYSE:ECA), and Cnooc (NYSE:CEO) and Chesapeake (NYSE:CHK), for instance. However, energy analysts say state-owned Chinese companies are paying a high premium. "The deal metrics look rich in Encana's favor," research analysts at Credit Suisse said.

An alternative route is letting foreign firms into the domestic market. Executives at CNPC – China's biggest energy company – have said they aim to produce 500m cubic metres of shale gas by 2015. With other firms such as Sinopec (NYSE:SHI), Royal Dutch Shell (NYSE:RDS.A) and Chevron (NYSE:CVX) lining up to enter the business.

And indeed, Shell has just announced the first success. China has no commercial shale gas production at the moment, and some industry experts had assumed its geology would not be conducive to shale gas. However, Yuzhang Liu, vice-president of Petrochina's Research Institute of Petroleum Exploration and Development, said: "Shell has two vertical wells and they got very good primary production. It's good news for shale gas."

Some experts argue that the US will become a major exporter of gas to Asia: Now, many observers see a day when the U.S. could become a major gas exporter. O'Malley sees more deals made for sales of LNG from the U.S. to Asia, the world's largest LNG market, where prices are higher. He believes U.S. exports could take the place of supplies expected from expensive and complicated projects in Australia.

However, not everybody agrees with that. According to Senior Vice President Hirshberg from ConocoPhillips (NYSE:COP), some gas will be exported from the U.S., but he doesn't expect the world's biggest economy to become a major player in the global gas export market in the near term.

A possible consequence of China experiencing a similar shale gas revolution as the US, and the export market will not materialize to the extent that is now expected. The Australians are a little worried about that. However, the resulting fall in prices might boost demand further, offsetting some of the effects:

“Higher shale gas production displaces LNG and has by far the most impact on LNG,” said Ken Medlock III, the James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics at the James A. Baker III Institute for Public Policy at Rice University. “We see gas demand moving higher; and you have a reciprocating impact. When you have more available domestic supply, you see lower prices and get higher demand in China.” [epmag.com]

One has to realize that Chinese use of natural gas comes from a very low basis and is growing extremely rapidly. According to Seeking Alpha contributor Vinod Dar, domestic supply isn't likely to keep up with this. Currently natural gas accounts for less than 5% of primary energy use in China and 10% in India, compared with the global average of 24%. China wants to sharply increase the share of natural gas in domestic consumption over the next 3 decades, quadrupling use over the next 20 years.

And indeed, the demand for natural gas may hit around 130 billion cu m (cubic meters) in 2011, and the figure is set to climb to 230 billion cubic meters by 2015, the country's biggest oil and gas maker by market value said on Thursday. Domestic output of the fuel will reach 150 billion cu m in 2015, a rise of 58 percent compared with 2010.

Therefore, demand for imported LNG from China (as well as India) could be rising especially rapidly. According to chief executive officer of Santos Ltd, demand for liquefied natural gas in China and India may surge more than sevenfold by 2025 as the nations boost their use of cleaner-burning fuels. Well, that's just Santos's CEO speaking. Although he's hardly alone in that, there are also less bullish voices. Royal Dutch Shell has found shale gas in China, prompting fears that the country could develop enough domestic supply to limit imports of liquefied natural gas.

Another thing to keep in mind is that LNG imports are twice as expensive as domestically produced gas, and the domestic price is capped. That sort of rigs the market in favor of cheaper domestic producers. So how realistic are those fears of the Australians?

Well, developing Chinese shale gas faces some major hurdles. The chances of a rapid expansion are probably not that big as the Chinese geology differs substantially from that of the US. China's shale is older and tonne for tonne, it produces less than half the gas of shale in the US. Water shortages will add to the costs. One of China's two biggest deposits in the country – the Turpan Basin in Xinjiang – is a desert.

China still faces significant hurdles to getting the gas out of the ground at home, such as clarifying the legal framework for contracts, transporting the gas and delineating the size of the reserves. New York-based consulting firm Eurasia Group also notes that China's shale reserves are widely dispersed and some are in heavily populated, mountainous, or arid areas. In addition, some of China's shale reserves are older and denser in geologic terms than those found in the U.S. Existing technology may therefore not be suitable for Chinese conditions and will require adjustments, implying increased costs. [Rigzone]

Here is Seeking Alpha contributor Vinod Dar again:

It takes the right combination of technology, entrepreneurial acumen, business practices, access to physical infrastructure, mineral ownership rights and laws, regulatory system and network of many field service companies to turn the resource into reserves and then commercial production. Only in the US can an emerging play go from declination to production in a year. It takes longer in Canada and Australia and will take much longer everywhere else because the right combination does not exist and will have to be fashioned.

Most seem to converge on something like the following, though:

Wood Mackenzie’s new study looking at the fundamentals of the China gas industry titled ‘Race for Supply – the Future of China’s Gas Market’ finds that unconventional gas, particularly shale, will increase significantly to help meet China’s strong gas demand growth. Domestic unconventional production will account for over a quarter of total gas supply by 2030. However, unconventional gas resources will take a significant time to develop and therefore meeting its gas demand will require China to import significant additional volumes of LNG and piped gas, particularly up to 2020. [Oil&Gas Financial Journal]

Others basically agree that unconventional Chinese gas isn't going to play a major role until 2020 at least:

China, already a large producer of tight gas, will likely not see greater production in shale and CBM for several more years. ... We believe that China’s shale gas production will not materialize for a few years. Production could reach 0.2 bscf/d in 2015 and 0.9 bscf/d by 2020 under our base-case forecast.

Adding CBM and shale gas together, the total unconventional gas output in China could reach 1.5 bscf/d in 2015 and 2.9 bscf/d in 2020 under our base-case scenario. If these projections hold, unconventional gas output will account for 16% of China’s total domestic gas (natural gas plus unconventional gas) by 2020.

If the production of unconventional gas is large enough, future LNG imports may be affected. However, FGE believes that the direct impact on LNG will be limited through 2020. CBM will continue to meet demand growth in the inner northern regions of China, while LNG’s role will continue to meet the coastal region’s gas demand. Under the above base-case scenario for unconventional gas production, China is expected to import 25.2 mmtpa (million metric tons per annum) and 37.5 mmtpa of LNG in 2015 and 2020, respectively. [NBR (pdf)]

Until the turn of the decade, things are unlikely to move dramatically. However, we have to continue to keep an eye on the situation as it is not necessarily a linear development. Things could go fast, if the experience in the US is anything to go by. On the other hand, many of the Australians have already sold their gas in offtake deals lasting decades.

And as you could read in the first quote above from the BBC, China is important; its gas demand comes from a very low base and grows very fast, but it's hardly the only importer with increasing demand.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Is China Entering A Shale Gas Boom?