By Wenna Wang and Haibing Ma
On June 27th, 5 shares of shale gas reached their daily limits at Shanghai Composite Index, the largest stock market in China, lifting the whole Oil & Gas sector above the otherwise decreasing Chinese stock market. This was stimulated by a signal from the nation’s Ministry of Land and Resources: the second round of shale gas exploration rights is expected to open for bidding in September, and this time it will be open to private investors.
Shale gas, which is natural gas found in hydrocarbon rich shale formations, is one of the most important unconventional sources of natural gas and represents a rapidly expanding trend in onshore gas exploration and production today. The deposits are mainly extracted through hydraulic fracturing and horizontal drilling. Though it is not an ideal alternative to conventional energy sources, shale gas can be a key to energy independence and a lower carbon footprint, since it produces 43 percent and 30 percent less carbon dioxide emissions than coal and oil per thermal unit produced, respectively. However, not everything about shale gas is an improvement, as its extraction process may contaminate ground water and release volatile compounds into the soil, while the use of shale gas will still lead to greenhouse gas (GHG) emissions. The main mining techniques used for extraction, horizontal drilling and hydraulic fracturing, have been linked to various problems like water shortages, groundwater contamination, methane gas seeps, micro-earthquakes and coal fires. Sample surveys show that methane concentrations were 17-times higher on average (19.2 mg/L) in shallow wells located in active drilling and extraction areas than in wells located in non-active areas (1.1 mg/L on average). In addition, there are studies showing properties with shale gas wells were valued down due to the fracturing.
Shale gas, despite its drawbacks, remains undeniably attractive to China. Last year, as the largest energy consumer in the world, China had a remarkable dependence on foreign oil of 55.2 percent. About 90 percent of its energy consumption overall depended on coal and crude oil. Due to this heavy reliance on traditional fuels and a rapidly growing energy demand brought on by incredible economic growth, China is suffering from severe environmental deteriorations including but not limited to water contamination, air and soil pollution, increasing GHG emissions and worsening biodiversity.
Unfortunately for global emissions, China’s energy consumption won’t peak in the foreseeable future due to development needs— in fact, the International Energy Agency (IEA) suggests China may account for 40 percent of global oil demand growth by 2035. Although China has been developing its renewable energy resources significantly over the past few years, it may take time for renewables to account for a significant share of power generation. As such, China is being urged to increase the percentage of natural gas in its energy mix to meet its 2020 mitigation goal of cutting carbon emissions relative to its size of economy by 40-45 percent from its 2005 level. With 4.6 trillion cubic meters (162 trillion cubic feet) of proved conventional natural gas reserves, the country’s natural gas production reached 101 billion cubic meters (3.58 trillion cubic feet) last year. Shale gas looks even more promising according to a global assessment conducted by Energy Information Administration (EIA). The EIA estimates that China tops the world with a recoverable shale gas reserve of 1275 trillion cubic feet. The Chinese government later announced its own official estimation as 25 trillion cubic meters (883 trillion cubic feet). Encouraged by these assessments, China plans to produce 230 billion and 3.5 trillion cubic feet of shale gas in 2015 and 2020 respectively. However, despite Beijing’s ambition, China is still in the early stages of shale gas exploration with only 63 testing wells completed so far, and with only 30 actually producing an industrial gas flow.
On the other side of the Pacific Ocean, natural gas has become an indispensable part of the United States’ energy mix. Natural gas’ share in primary energy consumption increased from 22 percent in 1995 to 25.1 percent in 2010; shale gas, representing only 1 percent of America’s natural gas production in 2000 and now accounting for 30 percent, contributed significantly to the increasing role of gas in America’s energy structure. Between 2005, when the so called “shale gas revolution” took place, and 2011, U.S.’ dependence on foreign oil decreased from 60 percent to 45 percent. Meanwhile, gas prices have kept dropping and are now at their lowest point in 10 years. IEA announced that U.S. energy-related CO2 emissionsfell by 450 million tonnes over the last five years – the largest drop among all countries surveyed. This drop could be partially attributed to an increasing role of shale gas, as hinted by IEA’s chief economist Fatih Birol. In the foreseeable future, given EIA’s estimate that technically recoverable shale gas reserve in the States to be 862 trillion cubic feet (second only to China), shale gas may further help the country’s low carbon development path.
Since shale gas development is more mature in the States in terms of both technology and management, China has been trying hard to seek for cooperation opportunities with U.S. oil and gas companies. The three Chinese energy giants, namely China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec), and China National Off-shore Oil Corporation (CNOOC), started to engage in the international market in the 1980s, but have had little luck in investing in the States. In 2005, CNOOC, China’s largest off-shore oil and gas producer, withdrew its bid for Unocal, an American oil and gas company, after the intervention of the U.S. Congress. This $18.5 billion merger was a tentative effort of Chinese energy companies to probe the U.S. market. In 2009, President Obama and President Hu Jintao launched a U.S.-China Shale Gas Resource Initiative, aiming to promote energy security and create commercial opportunities for companies on both sides. This initiative claims that “United States and China will conduct joint technical studies” and experience gained in the United States will be used “to assess China’s shale gas potential”. CNOOC inked two deals to develop shale oil fields with America’ssecond largest natural gas driller, Chesapeake Energy, in 2011 and 2012 respectively. Sinopec also moved forward by nailing a $2.5 billion shale deal with U.S. natural gas company Devon.
The Chinese government has also decided to explore shale gas extraction technologies through domestic development. China now allows private, small scale companies to participate in bidding for extraction permits, utilizing market competition to promote technological innovations. So far, more than 70 companies, among which one third are privately-owned, have registered for the Chinese government’s second round tender of shale gas development approvals. Meanwhile, the central government is planning to provide tax-free incentives for importing shale gas extraction related equipment.
Developing shale gas seems to be a rational solution to China’s current coal-heavy and import-dependent energy structure, but both technical difficulties and environmental problems are obstacles that China will need to overcome.