Friday, February 17, 2012

China shale-gas drive appears over-ambitious...

China shale-gas drive appears over-ambitious...
By Robert M Cutler

MONTREAL - China seeks to produce 80 billion cubic meters per year (bcm/y) of natural gas from shale rock by the year 2020, according to authoritative reports of a draft of a national plan, but it will be fortunate to get one-third of that, according to a Bloomberg News survey of experts.

The US Department of Energy's Energy Information Administration (EIA) estimates technically recoverable shale gas in China at 36 trillion cubic meters (Tcm), while the Chinese government Ministry of Land and Resources unofficially puts the figure at 31 Tcm, of which only 25 Tcm are actually susceptible to be explored.

The ministry announced this week that it will emphasize shale gas survey and appraisal this year. The move follows the decision of the State Council, or cabinet, last month to designate shale gas as an "independent” mining resource, opening up the sector to private Chinese firms.

However, none of these figures really takes into account the actual geological situations of the resource in different parts of the country and corresponding constraints on its development. In fact, the geology is different from in the US, and the technical issues are more difficult.

For several years, Chinese energy companies have been scouring the globe (or at least North America, where the techniques are best developed) in search of shale-gas technology, including hydraulic fracturing ("fracking"), that they can use for the domestic development of the industry. In 2011, Chinese state-owned enterprises invested in Canada nearly one-third of the almost US$18 billion that they spent buying energy companies.

Sinopec bought Daylight Energy Ltd for about $2.2 billion, its largest foreign acquisition of 2011, to get access to shale-gas reserves in Canada. PetroChina was in talks with Encana Corp to acquire the latter's Cutbank Ridge assets until the price difference was seen to be unbridgeable, whereupon the Chinese company took its $5.4 billion bid off the table. Earlier this year, PetroChina paid over $1 billion for a one-fifth stake in a Royal Dutch Shell Plc shale-gas project in western Canada.

Chinese forays have also naturally extended to the US, where PetroChina announced a $2.5 billion investment in new fields under development by the US firm Devon Energy. According to the Financial Times, the latter sum represents $900 million cash and fully 80% of Devon's development costs, for which Sinopec will acquire, however, only a one-third stake. All of these investments are intended to gain access to shale-gas technology, in particularly hydraulic fracturing.

As a result of the differences from North American shale geology, however, it is not clear how transferable the technologies will be. Shale deposits in China are further down in the ground than they are in the US, where shale gas has become an important part of the country's fuel supply mix. This fact along with the increased complexity of the formations will increase cost of recovery by itself. In addition, "the mineralogy of the shale rocks in China is primarily … non-marine, which means … [they] have much [higher] clay content and are [less] easily fractured," according to energy analyst Neil Beveridge of Sanford C Bernstein & Co, as quoted by Bloomberg.

China became a net importer of natural gas in 2007. The result of delay in developing the country's shale gas will be a need to increase purchases from foreign suppliers. At the end of last year, Turkmenistan agreed to increase its exports to China from the South Yolotan field that China is helping to develop, from the previously agreed 40 bcm/y to 65 bcm/y. A 12 bcm/y pipeline is also under construction from Myanmar, scheduled to enter into service in 2013. Natural gas as well as oil was also under discussion during Canadian Prime Minister Stephen Harper's five-day visit to Beijing this month.

China also has the option for Russian gas from Siberia, through two pipelines, each with a projected capacity of 28 to 39 bcm/y. However, the memorandum of understanding with Russia over these projects was signed six years ago, and many rounds of negotiations have taken place, including at the highest level of the respective political executives. Still, no definite agreement has been reached, as disagreements over price persist. Both sides drive hard bargains, and there is no guarantee of a final resolution.
CNOOC and PetroChina have already signed several long terms supply contracts for LNG imports equivalent to almost 31 bcm/y with Asian firms that source LNG from Australia, Indonesia, and Malaysia. According to Businessweek, the French firm GDF Suez has estimated that China may need to import as much as 46 bcm/y natural gas equivalent of LNG by 2020, although estimating Chinese demand a decade hence is nearly as much art as science and estimates may differ by a factor of two or even more, depending on the methodology or lack of it. Still, there is a prospective shortfall of significant proportions, unless China suffers a "hard landing” to its current still-dynamic growth....

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