Over the past decade the U.S. has lead a shale development revolution. Through vast discoveries of this unconventional gas in the U.S., and continued learning and perfecting of hydraulic fracturing, the U.S. has been able to access unprecedented reserves which now make up 50% of domestic output, according to a paper published by the CSIS. As a result of increased shale inventories, natural gas prices have been falling, reaching record lows at times. (See figure 1) Seeing the success of their North American counterparts, developing countries in Asia are hoping to follow suit. A thriving Chinese economy and an increasing demand for a better quality of life are driving heavy demand for energy and natural resources.
Natural Gas in Asia Until Now
Until the early 2000’s, an abundance of domestic coal resources in in China delayed the exploration and development of natural gas, with gas being viewed as too expensive in comparison to coal. However societal development and growing concerns for the environment led country leaders to refocus their energy mix and look at the potential for domestic production and the expansion of pipeline import options for gas and LNG. Considering the vast amounts of coal resources in China, coalbed methane (CBM), a form of natural gas found in coalbeds, was the first to be exploited.
As interest grew in the U.S. shale success story, further analysis of Chinese basins revealed the existence of shale resources (See figure 1), however size estimates by various government bodies have not been consistent. By comparing Chinese basins with U.S. analogs, estimates of shale gas resources by the U.S. EIA and China Ministry of Land and Resources have been made at 1274.85 tcf and 886 tcf respectively; a substantial disparity. (CSIS) Reliable data is needed if plans are to be developed accordingly.
Under-ground and above-ground challenges
Eager to replicate U.S. shale development, there has been significant investment in the emerging Asian shale sector; however there are numerous reasons for its sluggish take-off. The conditions that facilitated its rapid growth in the U.S. are not mirrored in China. One of the biggest obstructions is technology. While many of the shale gas exploration and production technologies are commercially available, deployment expertise is severely lacking. It was noted in China’s Shale Gas and Development Plans for 2011-2015 that intensive research and technological breakthroughs are required for the success of this sector (CSIS). An article on Bloomberg Law.com noted that U.S. federal laws also limit the sharing of intellectual property, with much fracking software and technology protected by patents or regarded as trade secrets. While the U.S. is keen to open shale trade with Asia, there is concern that its role could be limited to giving up its technical knowledge, only to be made redundant at a later, more lucrative stage.
Another major area of concern is the lack of sound pricing mechanisms and a comprehensive regulatory framework for governing shale gas extraction and usage. Stipulations of production-sharing contracts demand that international investors pay corporate taxes on profits and share a large percentage of their output with the government, thus discouraging foreign engagement. Guidelines around the awarding of mineral rights and acreage bids are also needed in order to accelerate the pace of auctioning. Unlike the U.S. where the majority of its shale reserves were located on private land, the Ministry of Land and Resources in China is in control of shale acreage and often clashes with local governments over land auctions. It is likely that the policy on CBM development will be used as a basis for creating shale development policies.
As well as regulatory frameworks, the physical infrastructure to deliver shale gas will affect the rate at which shale is integrated into the Asian energy mix. The Shale Development Plans for 2011-2015 recognize that developing transportation and storage facilities would assist with shale gas growth. Current pipelines may require expansion to carry newly tapped shale gas, or perhaps newly laid lines (CSIS).
Geological and environmental factors are another major cause for concern. Chinese shale gas reserves are believed to be deeper underground and have a different composition than those in other countries; thus making them more complex to fracture. The effects of injecting methane gas and a host of other chemicals into the water which are needed to release the gas is a hotly debated topic and one which divides shale development advocates and environmentalists all over the globe. Study around the potential seismic activity related to fracking is only just beginning. With two million to four million gallons of water necessary to drill and fracture each well, the water-intensive nature of fracking is of grave concern in China too. The 2030 Water Resources Group found that by 2030, water demand in China will outstrip supply and eight out of ten river beds will experience water shortages.
While development of shale resources in China would greatly bolster the growing economy, unless it can overcome the technological, infrastructure, regulatory and geological obstacles, it may continue to be a net importer of natural gas. It has undertaken steps to acquire knowledge by strategically investing in unconventional resources in North America, however International energy companies will do their best to protect their technological expertise from being divulged. As the demand for energy continues to rise in China, the success or failure of its shale gas industry will be of extreme importance, affecting natural gas prices and global gas trade. As the industry develops and the number of data reports created multiplies, industry participants can rely on the advanced capabilities of ZEMA for data capture, analysis, and full integration with downstream ERP, C/ETRM, BI and financial systems to make more efficient and effective operational decisions.