China's Shale-Gas Potential and Peril

Reserves far surpass America’s. Getting it out is the problem
People queue up to buy natural gas in China’s Gansu province on March 27, fearing the price will rise in April Photograph by AFP via Getty Images

In China there’s a giddy feeling that the next energy gold rush is about to begin. Beneath the mountains of Sichuan province, the deserts of Xinjiang, and elsewhere, China contains twice the shale- gas reserves as the U.S., says the U.S. Energy Information Administration. China’s national planners enthusiastically back boosting natural gas production, which accounts for just 4 percent of the country’s total energy mix now. The government wants to double that share by 2015. “There’s a lot of exuberance,” says Zhou Xizhou, who leads the research firm IHS Cera’s China Energy practice. “In Beijing, if you work in energy, you probably receive a shale-gas conference notice every week.”

The impact of a shale-gas boom in China will be enormous, with the potential benefits and likely environmental costs perhaps even greater than in the U.S. So far, though, the output in China has been a trickle because of the challenging geography and the monopolistic structure of China’s oil and gas sector. While about 200,000 of the horizontal wells used in fracking have been drilled in the U.S., China has about 60. China has 1,275 trillion cubic feet of shale-gas reserves, compared with 637 trillion cubic feet for the U.S.

The U.S. shale-gas revolution was launched largely on the flatlands of Texas, North Dakota, Pennsylvania, and other accessible areas. In China’s mountainous Sichuan basin, “the formations seem to be more faulted and folded, which makes it more difficult and less economic to drill long horizontal well bores,” says Briana Mordick, an Oil & Gas Science Fellow at the Natural Resources Defense Council and formerly a geologist at Anadarko Petroleum.

Sometimes the Chinese must cut new mountainside roads to move trucks and equipment to remote sites. With higher upfront costs, “it will be significantly more challenging in China to make the wells pay for themselves,” Mordick says. “The technical learning curve is very steep. What works in one place may not work in another.“

The inflexible structure of China’s state-controlled oil and gas industry hampers efforts to exploit reserves. “In the U.S., it was not the oil and gas majors that started the shale boom” but rather small wildcat operators “willing to accept a high-risk, high-reward proposition,” says Melanie Hart, an analyst on energy policy and China at the Center for American Progress in Washington. “In a market system, you can have many small and large players all specializing in different pieces of the process.”

In China, until recently only the three state-owned giants—Sinopec, China National Petroleum (CNPC), and China National Offshore Oil—bid on gas drilling projects. The latest auction for exploration leases opened up bidding to state-owned enterprises in other industries, and the winners included several power and mining companies.

Once the Chinese find gas and figure out how to extract it, they’ll have to get it to factories and power plants. China’s pipeline network is far less extensive than the U.S.’s, and about 90 percent of its pipelines are owned and operated by a single company, CNPC, which has no legal obligation to hook up its rivals. The government regulates gas prices, so the costs of exploration and production can’t easily be passed onto consumers.

Despite these obstacles, most analysts think it’s only a question of time before large-scale commercial shale-gas production starts in China. IHS Cera’s Zhou predicts the industry must travel a “long and winding road” well into the 2020s before China’s shale gas is an important domestic energy source. Martin Stauble, who runs Royal Dutch Shell’s exploration and production in China, is more optimistic: He says commercial development “is likely to be in a three- to five-year time frame.” Shell is working with CNPC in Sichuan and Shaanxi provinces, and spending about $1 billion annually on exploration in China.

Environmentalists hope China avoids the downsides—including contaminated groundwater and man-caused earthquakes—that have accompanied the shale-gas boom in the U.S. “A lot of the problems of groundwater contamination come from poorly constructed wells,” says Sarah Forbes, a senior associate in the climate and energy program of the World Resources Institute. “As China begins its shale-gas revolution, it’s really important to establish strong regulations and oversight.” The country’s recent mishaps, including a chemical spill in Shanxi province last December and a massive 2011 oil spill in the Bohai Sea, are hardly encouraging signs.

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