Monday, July 16, 2012

China Has the Most Shale Gas: What's the Catch?

China apparently has vast resources of tight natural gas, waiting to be horizontally drilled, fracked, separated, and produced. But will China achieve the same incredible production bonanza which North American countries are experiencing? Perhaps not.
EXACTLY HOW MUCH unconventional gas lurks outside America is a matter for conjecture, but the list of countries with potentially large reserves grows steadily. Canada and Mexico are known to have lots. Australia already produces coal-bed methane and has plenty of shale and tight gas too. South Africa also has big deposits, though a fracking moratorium was announced last year. Argentina and India could join the shale club, and so could countries that already export conventional gas, such as Algeria and Libya. Even Russia and Saudi Arabia, the largest conventional oil producers, have the stuff.

But the biggest shale-gas reserves may be lurking in China. At the end of last year the IEA estimated the country’s total recoverable resources at 50tcm, over 70% of it in shale beds, most of the rest coal-bed methane. China already extracts prodigious quantities of the latter—some 10bcm last year. Only a handful of test wells for shale gas have been sunk, and it looks as though the geology may make it harder to get at than America’s.

But China has ambitious targets for getting its hands on it all the same. It wants to use a lot more gas to generate electricity and to fuel its expanding fleet of cars. Since 2000 its appetite for gas has grown by around 15% a year as the lights have come on in new towns and cities and the country’s breakneck economic expansion continues. At present gas makes up just 4% of the country’s primary-energy consumption. The latest five-year plan envisages an increase in that share to 8% by 2016. Even then, China will still lag far behind most rich countries, where gas generally makes up a quarter or more of the total energy mix.

Because of China’s vast size, what sounds like a small shift could have massive implications for the global gas market. An increase of one percentage point in China’s consumption is reckoned to equate to 25bcm a year, roughly half of what Qatar, the world’s biggest exporter of LNG, puts on the market annually.

To meet this enormous demand, China will need imports. Pipelines from neighbouring countries (including one of 1,100 miles from gas-rich Turkmenistan) and LNG regasification terminals have proliferated. At the same time China is making big efforts to step up domestic production of both conventional and unconventional gas.

The country’s eventual capacity to produce gas is hard to gauge. It has been seriously tapping its domestic conventional reserves for only a decade, and what gas it has is in inland provinces far from the economic powerhouses on the coast. But offshore deepwater exploration could yet produce considerable finds more handily placed in the South China Sea.

China is pushing exploration of shale gas by encouraging domestic producers to form partnerships with foreign oil and gas companies. BP, Chevron and others are involved in exploration joint ventures with Chinese partners. In the past couple of years Chinese state energy firms have struck multi-billion-dollar shale deals in America with Chesapeake Energy, mainly for shale oil, and with Devon Energy Corp for gas. The deals gave them an opportunity to learn about shale technology from American operators. Yet shale gas is unlikely to make a serious difference to the country’s supplies for several years yet. _Economist

So why might China's experience with shale gas be less prolific than North America's? First, let's look at one reason why Europe may be slow to develop its rich shale gas resource:
'Whoever owns the soil, it's theirs up to Heaven and down to Hell." So goes the ancient common-law principle. Today, however, almost no major country recognizes full subsurface private property rights, except for the United States.

We mention this because that blessing of American jurisprudence helps explain one of the few bright patches in the Obama economy—the booming production of shale gas and, increasingly, oil. The U.S. ranked 159th in GDP growth last year. But in natural gas production, it's now No. 1. _WSJ
European countries do not typically grant mineral rights to private property owners. Without the chance of profit from the riches under their property, owners are likely to strongly resist oil & gas drilling. And they are likely to do so as a large and powerful political block.

In the US, private property owners with mineral rights are willing to negotiate with drillers -- small or large -- for leasing rights. The hope of striking it rich is contagious, and many US private property owners have profited significantly from signing a simple contract.

Also in the US, legal obstacles to mineral exploration and production are generally lower than in Europe and many other countries -- at least when working on private property.

China's wealth is concentrated in the hands of a relative few, politically connected families and state-connected groups. Property rights are few, and mineral rights to anyone but the state and the state-connected are virtually non-existent.

China's people are already unhappy over the expropriation of their limited land rights by local and regional governments who are eager to build new industrial and real estate infrastructure. China's environmental record is extremely poor on all fronts, and the prospect of opening a vast new land-hungry industry which may conceivably -- if done badly -- further endanger China's air and water supplies, must make many of China's land rights activists very angry.

In many locations, this issue will not come up. And when the issue of limited land rights and land expropriation does occur, the governments of China can put their foot down. But in the age of twitter and other forms of easy communication, China's follies can be broadcast to the world more easily than ever. China will have to tread softly.

But in the long run, China may be able to cut its strings to Russia's Gazprom, and slowly reduce its dependency upon coal (freeing up coal for CTL). China may even have enough gas to go into the GTL and LNG industries.

Whether quickly or slowly, this development has the potential to upset global energy markets, and should be monitored.

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