Shale gas in China will develop faster than expected

Shale gas in China will develop faster than expected

Shale gas and China is not exactly a novel combination of words, it has been discussed repeatedly at least since the shale gas boom in the US, but there seems to be an upswing in interest lately, so I figured its time to take a closer look.

The first thing I find of course is a range of super-optimistic headlines in the news: Is China entering a shale gas boom?, Energy companies rush into shale gas developments in China,China shale gas discoveries major boost to supply, China shale gas boom could surpass US, and plenty more of the same sort.

And the facts and happenings underlying the headlines are indeed quite interesting - 2011 seems to have been a year of positioning and getting ready for a shale gas boom; in April the first horizontal well was drilled, the entire year most of the international oil companies have been lurking around looking for their way in, Shell has drilled a couple of test wells with very promising results, several large discoveries are made, and the Chinese national oil companies are looking to buy up american fracking technology.

Still, most of the “experts” in this industry seems to believe that the shale gas development in China will be fairly slow. They expect shale gas may contribute some 16% of domestic production in 2020. It makes me wonder if they have already forgotten the development we have just witnessed in the US. And Chinas reserves are 50% larger than that of the US, enough to cover Chinese domestic demand for natural gas for the next 300 years. So why should it develop so much slower in China? I dont get it.

On the contrary, the Chinese have a proven track record over the past couple of decades of getting things done really quickly. Living in Shanghai, I get to observe this almost every day; a new skyscraper pops up over here, a new road is rolled out over there. On top of this, there is now a financial incentive for the Government to move fast when it comes to domestic shale gas production: Currently new long term supply contracts for natural gas, in the form of LNG, are being signed at 15 dollars/mmbtu and upwards. At the same time the regulated domestic price for natural gas in China is in the area of 5 dollars/mmbtu. Yes, this means that the Government, or the taxpayers, are subsidising around 10 dollars for every mmbtu of natural gas consumed in China. Poten & Partners stated in a conference in Singapore in September that they have estimated this to amount to at least 6 billion dollars per year in subsidies. When domestic shale gas can be profitably produced close to the regulated prices, you should think it would be interesting to save 6 billion dollars?

My prediction is therefore not surprising: shale gas in China will develop much faster than analysts currently project.

China needs energy to maintain growth... And to keep the lights on