Friday, December 9, 2011

China Catches the Shale Gas Fever While Ramping Up Imports

When China will start exploring and pumping gas from shale formations is only a matter of time.  And that time might be approaching.  While China has not started the commercial production of shale gas yet, the rising demand of natural gas, estimated at 300 billion cubic meters (bcm) a year by 2020, coupled with its recoverable domestic shale gas of 36 trillion cubic meters (tcm) portend a major development, which quite possibly could exceed the US shale gas production levels.  According to the US Energy Information Agency, US has 23.4 tcm of recoverable reserves of shale gas.  The Chinese government hopes to increase gas production from unconventional sources, including shale and tight gas and coal bed methane, up to 150 bcm/year.  The recent discovery of major shale gas reserves in China’s western Sichuan province could increase domestic supplies of gas. 
However, as in other potentially shale gas-rich areas of the world, the country could face problems with water shortage and environmental impact, given the use of vast amounts of water and problems with treating the flowback liquids, as in the US.  The cost of drilling shale gas in China remains another challenge, particularly given allegedly more complex geology of the country.  But following the US model, China hopes to reach the successful commercial production of this energy source within five to 10 years. 
At this point, China’s immediate issue at hand remains pricing of imported natural gas from Turkmenistan, which has reached 17.5 bcm/year since 2009 and “accounting to over half of the country’s total gas imports.” President of Turkmenistan Gurbanguly Berdymukhamedov announced on November 11, 2011, that gas deliveries to China would go up to 65 bcm/year through the quickly expanding capacity of the China-Central Asia pipeline.  As gas imports climb, the increasing problem in China is underpriced domestic natural gas prices and higher import prices that have caused losses to Chinese gas suppliers and importers.  Relative to coal-operated plants, gas-fired power plants, heat and power producers have been paying close to 20 percent more for natural gas in China.  As this author wrote on this problem for European Energy Review this spring, it may be a question of time when sustained pressure on the price and rising gas imports will make liberalization of China’s gas sector a necessity, given the rapidly rising gas demand. 

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