Memo #76
Margaret Skwara – margaret.skwara [at] gmail.com
Will Sichuan’s landscape one day resemble northeastern British Columbia’s Horn River Basin, one of North America’s most promising shale gas plays? The least contentious answer is ‘it won’t anytime soon,’ but there are many who would like to think so, especially in China. With the socialist revolution under their belt, Beijing is taking on another one – the shale gas revolution of North America. What the shale gas revolution lacks in cadres, it makes up in energy; coincidentally, the type most favoured by Beijing – the potential energy stored in hydrocarbon molecules of methane gas.
Shale gas production has had an unprecedented effect on North America’s natural gas market. Supply of natural gas is now at record high levels, prices are low, and liquefied natural gas (LNG) import terminals stand idle. These market transformations resulted from technological advancements in horizontal drilling and hydraulic fracturing, and the magnitude and speed of these changes have been appropriately labeled ‘revolutionary.’ Applying similar technology in China would significantly improve energy security and, by offsetting dependence on coal, increase the standard of living, two aims which indeed justify Beijing’s hurried pursuit of domestic shale gas production.
A recent study pegged China’s technically recoverable shale gas resources at a massive 1,275 trillion cubic feet, larger than Canada and the US combined. Resource size clearly favours development, but obstacles remain. Shale gas production is high-tech and water intensive, both of which are hardly abundant in China. Moreover, natural gas prices are government regulated, eroding incentives for private entrants. Domestic production of natural gas is priced at a significant discount compared to imports, either via pipeline from Turkmenistan or shipped in as LNG (both of which are indexed to crude oil). Reforms over the years have attempted to link these two price points, but aggregate production and import costs continue to outweigh what the consumers can afford to pay, resulting in seasonal shortages, market disruptions and ongoing subsidies from Beijing. In instituting reforms, China is treading slowly to avoid inflationary pressures and popular discontent, but it is fully cognizant that higher natural gas prices are required to stir investment. As PetroChina completes its first horizontal shale gas well in Sichuan (威 201-H1), policy makers in Beijing are facing the formidable task of instituting reforms that are gradual for the interior, but more prolific for the lucrative coastal region customer groups.
About the Author:
Margaret Skwara – alumni, Master of Arts – Asia Pacific Policy Studies (MAAPPS), The University of British Columbia. Currently a natural gas markets analyst based in Calgary, Canada.
Links:
- Understanding Canadian Shale Gas – Energy Brief, National Energy Board, 2009
- World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, U.S. Energy Information Administration, 2011
Related Memos:
- When Cambodia’s Oil Begins to Flow: the Politics of Becoming a Petro-State, by Andrew Cock (Memo #29)
- Canadian Mining and Human Rights in Asia: Building an Advantage or Dismantling Competitiveness?, by Robert Hanlon (Memo #16)