Thursday, June 28, 2012

Challenges of China’s Fuel of Choice

The Chinese economy has grown by an average of 10 percent a year over the past two decades, crossing the milestone to become the second-largest economy and energy user in 2010 after the U.S., as well as the world's largest emitter of greenhouse gases. Stable energy supplies being at the core of China’s rise, they remain pivotal to its continued economic growth, especially coal, oil and gas. While coal still constitutes around 68 percent of China’s energy use, Chinese policymakers and energy executives lean more and more towards cleaner fuel sources, particularly natural gas. According to International Energy Agency’s June 2012 report, the share of natural gas is set to rise in China’s energy mix, which is expected to have strong implications on the country’s energy usage in the years to come.

Analyzing the new role of natural gas in China, my new article published in Oilprice looked into China’s natural gas policy, main players in its gas market and problems it faces with the rise of Central Asian gas imports (full article can be accessed here). I concluded that mounting natural gas demand, combined with the official endorsement of clean energy sources, is bound to solidify the position of natural gas in China’s energy mix in the years to come. But liberalization of domestic natural gas prices will be absolutely key to attracting private investment to successfully develop domestic gas and to continue importing this energy source without hurting Chinese energy companies.

Wednesday, June 20, 2012

Why U.S. Shale Gas Will not Be a Cookie Cutter Model

A new report of the International Energy Agency (IEA) on unconventional natural gas earlier this month predicted that “global exploitation of shale gas reserves could transform the world's energy supply by lowering prices, improving security and curbing carbon dioxide emissions.”  But unconventional gas revolution may fall short of its promise if social and environmental issues are not adequately addressed. The IEA report points out many common concerns about shale gas extraction in the U.S. and other countries.  Chiefly among them are groundwater and air pollution, dangers of structural faults in well drilling, disposal of flowback water, and emissions of polluting gases from wells, which are some of the factors of public skepticism about the industry’s safety.

As more countries begin to tap shale gas, the learning curve promises to be steep.  Countries with major shale gas reserves, such as China, Australia, Poland, and Canada, are aware of the long lead times, high capital and operational costs, necessary price environments to attract investment, and the importance of overcoming regulatory and environmental constraints before this resource becomes a reality.  Just this week, Europe’s biggest shale potential in Poland came under question and confusion after ExxonMobil pulled out of shale exploration in this Eastern European country due to unsatisfying findings, legislative foot dragging and complex geology.

Conditions that existed in the U.S. to revolutionize this industry may not exist in other countries to easily replicate its success, which include geological differences, inadequate or lack of access to equipment, water, manpower, and infrastructure as well as complex land ownership issues. Because maturity of the shale gas industry outside the U.S. will take anywhere from five to ten years before it reaches commercial production levels, developments in this unconventional gas sector in America are likely to set the tone to other countries.  In other words, what happens in the U.S. shale gas is bound to have ramifications on the trajectory of the industry elsewhere because the U.S. is far ahead of the rest of the world in exploiting this energy source. 

As much as there is enthusiasm and effort to follow the footsteps of the American unconventional gas evolution, a possible serious incident in the U.S. shale gas may set the newly emerging industry back in the rest of the world.  Given an already complex set of costs and public concerns over hazards of shale gas in many countries, an incident in one country is likely to cause more stringent regulations, and even more moratoria, in others.  In such a scenario, costs of drilling and operations are likely to be even higher for investors and operators with an added challenge of winning hearts and minds of the distrustful public.  The U.S. may have brought down the costs of taking natural gas out shale rocks, but its global success and acceptance will hinge on minimal mistakes and no major disasters.

Friday, June 8, 2012

Obama's Energy

As the election day draws closer, U.S. President Barack Obama’s record on energy is increasingly under scrutiny with mixed conclusions. The left praiseshis record to date, as the right remains highly criticalof it. The point of contention is not just the yoyoing oil prices and the delayed Keystone XL pipeline. It is also about debate over domestic oil and gas production and Obama’s support of renewable energy. Although unconventional oil and gas production saw a major increase in recent years, leading to a creation of many jobs in the shale gas and oil sector, as well as reduction of oil imports for the first time in a long time, the American Petroleum Institute (API) insistedthat the “White House is lying to the American public when it says its policies are responsible for increased oil production.” According to API’s PresidentJack Gerard, “Obama is taking credit for policies enacted under the previous administration.”

Politics and politicization of energy aside, while the Obama administration made mistakes on some key matters, e.g. shelving Keystone XL or blowing money on Solyndra and other less than economically sensible solar projects, it did not interfere with the production of shale gas and oil that transformed the energy landscape of the U.S. It is important to remember that as much as any U.S. President would be keen to have an exclusive access to a magic red button to bring up or down oil prices, they are not – and will never be – under his or her control. It is a deliberate misrepresentation to put globally-driven high oil prices on a president of a country, unless that president is a cause of a major world event, such as war, natural disaster or depletion of oil.

At this point, nothing major in the energy sector is likely to happen before the November elections. So, the focus should be on the outlook of the U.S. energy policy that goes beyond bumper stickers of the extreme left or right. As the unconventional energy business matures, the level of regulation at the state and federal jurisdictions is likely to remain a source of contention both sides of the aisle. If Obama is re-elected, his record on energy will be further put to test, depending on how his administration regulates the shale gas and oil industry, how many drilling leases on federal lands will be issued, when onshore drilling permits will come to life, what happens with clean energy, and how the right and left will react to them. Obama’s challenge will be living up to the “all of the above” plan and providing leadership to develop an unpoliticized comprehensive energy policy for the country.