China and unconventional gas: how will China ride the wave?

The last two years has seen an accelerating realisation around the world of the significance of the development of large reserves of shale gas in the U.S.A. The domestic gas market in the country has been transformed, at least in the short-term, as has the Atlantic market for liquefied natural gas. The waves from this technological advance are spreading around the world as companies evaluate the potential of geological basins on other continents to yield large reserves of gas.

These developments have the potential to have a significant impact on the trajectory of energy production and consumption in China, the world’s second largest consumer of energy; and any impact on China will have global consequences, for energy markets, for investment flows and for carbon emissions.

Conventional gas accumulations tend to occur in discrete accumulations and have a number of common features. In simple terms: the gas has accumulated in a porous and permeable reservoir rock which lies in a physical trap which, in turn, is sealed by a non-permeable cap rock. Drilling wells into the reservoir allows gas to flow to the surface and be used. The economic value of such conventional gas fields depend not only on the physical quantity of gas in the field, but also on the costs of extraction. These costs depend greatly on how easily the gas can flow through the reservoir to the wells. A common reservoir rock is a porous sandstone.

Unconventional gas accumulations occur in rocks which have very low porosity and permeability, and they require new technologies to extract them. In particular, the exploitation of these gas accumulations require the combination of horizontal drilling over long distances and extensive fracturing of the rocks holding the gas. Three types of unconventional gas accumulation are commonly exploited: tight gas sands, gas shales and coal. Gas has been produced in the U.S.A. from all three of these types of deposits for decades, but only recently has technological innovation allowed rates of production from gas shales to rise to levels which will allow the production of large volumes of gas at relatively low costs.  

A further characteristic of unconventional gas accumulations is that they are not limited to discrete accumulations but can cover entire geological basins. As a result the potential exists for new, very large accumulations of gas to be discovered and exploited, not just in North America but on other continents. Current speculation places future recoverable reserves of unconventional gas in the hundred of trillions of cubic metres; that is to say, possibly significantly larger than currently proven reserves of conventional natural gas. As a consequence, we should expect the share of natural gas in global energy consumption to continue rising for many years. Further, much of the new, unconventional gas is likely to be developed within regions of high energy demand such as North America, Europe, China and India.

Few benefits come without costs and risks. The exploitation of unconventional gas reserves through fracturing poses significant challenges relating to water resources management and water contamination. Fracturing requires large quantities of water, and the chemicals used to induce the fracturing can enter the water supply if care is not taken.

These recent and ongoing developments have great potential significance for China. Firstly, they will place a downward pressure on global gas prices, which is good news for a growing gas importer such as China. Secondly, they will open up new sources of nearby gas supply for LNG imports to China. This is illustrated by the partnership formed between PetroChina and Shell to acquire Arrow Energy, which possesses substantial reserves of coal-bed methane in India, Indonesia and Vietnam as well as in China, and by the agreement between CNOOC and BG focused on the exploitation of coal-bed methane in Australia.

Of greatest importance for China is the extent to which domestic reserves of unconventional gas can be identified and exploited. Tight gas sands are already being exploited in the Ordos Basin of northern China and in the Sichuan Basin. Indeed, these accumulations provide some 15% of the nation’s domestic natural gas production, a proportion which may rise to 30% by 2020. Collaboration with foreign companies such as Shell and Total has been and will continue to be crucial for this success.

The country’s energy companies have been working jointly with foreign companies since the early 1990s to develop coal-bed methane reserves which are abundant in some of the major coal basins of northern China. Progress has been slow as the companies struggle to overcome technical challenges. Current production is about one billion cubic metres per year, compared to total gas production in China of about 90 billion cubic metres per year. The government is aiming for coal-bed methane production to reach 3.5 billion cubic metres per year by 2015.

Exploration for shale gas is only now starting in China and the government has committed to funding the assessment of these reserves. BP and Exxon have already shown an interest in participating. Provisional reports suggest that the marine shales in the southern part of the country may offer the greatest potential. Offshore, Chinese companies are also exploring the potential to produce gas from hydrates on the sea-floor.

A number of questions may be raised in the context of China’s future domestic unconventional gas industry. The most fundamental questions are geological and technological. What is the extent and what is the nature of the potential resource, and how quickly can technologies be adapted to exploit these resources at a large scale and in a cost-effective manner? The answers to these questions depend on a combination of the geological endowment, on effective collaboration between China’s companies and international companies, and on the price offered on the domestic gas market. All of these variables are highly unpredictable. The only one which currently lies under the direct control of the government is the price of gas. In this respect China’s government is continually having to balance the needs of gas producers and gas consumers.

A key regulatory challenge faces the government in the need to closely monitor and control the use of water and the contamination of water supplies. environment and water. Across much of the populated regions of China, water is already scarce and its quality low. The exploitation of unconventional gas will put greater pressure on the regulatory capacity of central and local governments.

In the wider context of energy policy, a number of questions may be posed. Will any new domestic gas supplies from unconventional sources be used to replace anticipated future supplies of gas from overseas in order to reduce dependence on external supplies, or will they be used to supplement these gas imports. In other words, to what extent will unconventional gas be used to accelerate the rate of use of gas in China? The direction taken on this policy issue will have significant consequences for potential suppliers of gas to China, in Asia, Australia and the Middle East.

This also has a strong bearing on China’s transition to a low carbon economy. If the government chooses to promote self-sufficiency and security of energy supply, then it may choose to constrain gas imports and rather rely of domestic sources of coal and gas. It is also worth asking to what extent the enhanced availability of new domestic gas supplies may cause a conscious or unconscious relaxation of the government’s current energy efficiency policies.

Finally, a major campaign to explore and exploit unconventional gas resources in China will require a massive effort on the part of the national oil companies in terms of capital investment and management time. After the recent rapid expansion of overseas activities by these companies, the companies may decide that they have to rationalise their overseas investments in order to provide sufficient capital and management time needed to udnertake the domestic search for unconventional gas.

Print Friendly, PDF & Email