China Shale Delay to Boost LNG Imports in Boon for Exxon: Energy

China’s ambitions to unlock the natural gas trapped in shale rocks are likely to take longer than planned, boosting the nation’s reliance on overseas suppliers from Exxon Mobil Corp. to Royal Dutch Shell Plc.

Shale gas output will rise to 23 billion cubic meters in 2020, or 29 percent of the government’s 80 billion target, under the average estimate of seven analysts surveyed by Bloomberg. The shortfall, stemming in part from tougher geology, should boost liquefied natural gas imports from about $5.8 billion in 2011 while curbing speculation that the nation can duplicate the U.S. shale boom that has upended global energy markets.

Drillers in China, the world’s biggest holder of shale reserves, have yet to produce shale gas commercially, with Shell helping China National Petroleum Corp. to sink the nation’s first horizontal well. Explorers such as Cnooc Ltd. and China Petrochemical Corp., which have invested more than $5.7 billion in so-called unconventional oil and gas assets overseas, have found their technology lacking at home.

“There are resources in China but the geology is different and more challenging than in the U.S.,” Liu Zhenwu, a vice president at state-run CNPC’s advisory center, said in a Feb. 7 interview in Bangkok. “Technical issues need to be solved first. It may take a few years, maybe a decade, maybe more, before large quantities of shale gas are produced in China.”

Until then, China will need to boost purchases of LNG from providers such as Exxon, Chevron Corp. and Woodside Petroleum Ltd. to meet demand. The nation imported 12.2 million metric tons of LNG in 2011, worth $5.8 billion at last year’s average price, customs data show. Paris-based GDF Suez SA estimated shipments may almost quadruple to 44 million tons in 2020.

Shale Versus Imports

“China may well emerge as a new shale-gas frontier, but production isn’t likely to be in very significant volumes compared with conventional gas supply for a decade at least,” said Thomas Grieder, a Geneva-based Asia Pacific energy analyst at industry consultant IHS Energy. “The country will continue to rely on LNG imports.”

The global LNG market last year was valued at about $123 billion, based on an average price of $10 for a million British thermal units and 336 billion cubic meters of shipments.

Grieder forecasts China will produce 20 billion cubic meters of shale gas in 2020. “The government’s target is ambitious,” he said. “It reflects their confidence about the resource base and about strong domestic and foreign investor interest in the sector.”

Gas Prices

The U.S. produced 96 billion cubic meters in 2009, overtaking Russia as the world’s biggest natural gas provider. Output surged to 142 billion cubic meters in 2010, causing prices to slump. Cheniere Energy Inc. and Freeport LNG Development LP are among companies that plan to liquefy and export U.S. gas.

Natural gas prices in New York were close to $10 per million British thermal units end of 2000 and rose a record of $15.38 per million British thermal units in December 2005, spurring drilling investments. Prices on the New York Mercantile Exchange have dropped 18 percent this year. The March contract rose 1.2 percent to $2.46 per million British thermal units at 7:52 a.m. New York time.

Chinese shale may hold 1,275 trillion cubic feet (36 trillion cubic meters) of technically recoverable gas, 12 times the country’s conventional gas deposits, an April report by the U.S. Energy Information Administration said.

That’s almost triple the 482 trillion cubic feet in the U.S., according to a Jan. 23 estimate by the EIA. It didn’t give a revised estimate for China. U.S. engineers pioneered techniques to extract gas from shale about 17 years ago.

‘Not Gotten Started’

“The U.S. shale gas industry is booming, and we’ve not gotten started yet,” said Zhang Jinchuan, a professor of geology at the China University of Geosciences in Beijing and an adviser in shale gas to China’s Ministry of Land and Resources. “If the industry develops quickly, then China could possibly catch up with the U.S. in 15 or 20 years.”

A survey by the Chinese government last year showed 25 trillion cubic meters of reserves could be explored in the country, Zhang Dawei, deputy head strategic research at the land ministry, said in a Jan. 9 newsletter. China aims to produce 80 billion cubic meters annually by 2020, Zhang said in October, citing the draft of a national plan.

The country may hold about 31 trillion cubic meters of the resource, or about 14 percent less than the U.S. EIA estimate, Xinhua News Agency reported. It cited Wang Min, vice minister of land, at a Feb. 12 national geological survey conference in Beijing.

Wang was more optimistic about shale-gas output, saying it may exceed 100 billion cubic meters in 2020, Xinhua reported. China hasn’t published an official estimate of the resource.

Complex Geology

“On average the shale deposits in China are deeper than in the U.S. and more difficult to get to,” Neil Beveridge, an energy analyst at Sanford C. Bernstein & Co. in Hong Kong, said Feb. 10. “The minerology of the shale rocks in China is also primarily what is called non-marine, which means their productivity could be lower. The U.S. has marine shales which have much lower clay content and are more easily fractured.”

Teams that unlock gas with hydraulic fracturing, or fracking, in the U.S. found success mostly from 2 kilometers (1.2 miles) to 4 kilometers deep, while in China some key deposits are found 6 kilometers down, according to Beveridge.

Chinese shales are also structurally more complex and pose greater challenges to design wells. Overcoming these issues adds to costs, he said. Delays in auctioning shale acreage and framing rules and incentives to encourage exploration may also slow development.

Chinese Auctions

China first auctioned exploration blocks in June and has delayed a second sale twice because the land ministry plans to double the number of areas to be offered and is drafting a national plan to develop the resource. The government plans to hold the tender by the end of this month or in early March, the land ministry’s Zhang said Feb. 13 by telephone.

Foreign explorers are barred from participating directly in the auctions and must partner with Chinese companies.

China may need to ease price controls to allow domestic fuel suppliers to earn a profit. Gas importers are losing money as they typically buy at overseas rates that are higher than the fixed domestic prices they are allowed to charge customers.

“A key difference between China and the U.S. is the way people do business,” Zhang, the geology professor, said Feb. 10. “In the U.S. everybody can apply for exploration rights and run it as a business. China needs to encourage companies to invest in the hope of earning a reasonable return. We have so many rules that prevent entry into the sector.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE