China Seeks Scapegoats in Expected Shale Gas Shortfall

An analysis by Michael Lelyveld
2014-11-10
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Two workers ride a motorcycle past a gas station of PetroChina, a subsidiary of CNPC (China National Petroleum Corporation), in Chongqing, Sept. 11, 2014.
Two workers ride a motorcycle past a gas station of PetroChina, a subsidiary of CNPC (China National Petroleum Corporation), in Chongqing, Sept. 11, 2014.
ImagineChina

As China searches for shale gas, it has been finding a host of reasons for falling short of its goals.

At recent conferences in Shanghai and Beijing, officials voiced confidence in meeting targets for the new natural gas technology in the near term.

But a host of problems surfaced for producing larger volumes of gas to fulfill the government's longer-term forecasts.

Speaking at an industry workshop in Beijing, National Energy Administration (NEA) vice director Zhang Yuqing said China was on track to produce 1-1.5 billion cubic meters (35-53 billion cubic feet) of gas this year from shale rock formations and 6.5 billion cubic meters (229.5 billion cubic feet) in 2015.

The figures were roughly in line with the NEA targets announced in March 2012.

But participants cited a series of obstacles to expanding production and duplicating the U.S. boom in shale gas that could make it a major source of cleaner energy for China by 2020.

In August, the NEA abruptly cut its 2020 target for annual shale gas production by more than half from 60-100 billion cubic meters (2.1-3.5 trillion cubic feet) to 30 billion cubic meters (1 trillion cubic feet).

"The previous targets were more of a vague prospect, a hope. Thirty bcm (billion cubic meters) is a more realistic goal," an unnamed government official told Reuters.

Even at the lower level, the new goal would imply an ambitious average annual growth rate of 36 percent over five years.

Comments from the conferences and other industry feedback suggested that even the revised target may be stretch.

While state-owned refining giant Sinopec has been developing significant shale resources at its Fuling field in southwest Chongqing municipality, similar successes elsewhere have been elusive.

Fuling has produced a total of 1 bcm (35 billion cubic feet) since commercial exploration started in March 2013, the official Xinhua news agency reported on Oct. 31.

Exploration has focused on China's remote northwest, where water for hydraulic fracturing is scarce, and the southwest, including Sichuan province. The geology there is described as "difficult," the South China Morning Post reported last month.

In March, official media reported that international oil major Shell had committed to "substantial investment" with state-owned China National Petroleum Corp. (CNPC) for shale gas in the Sichuan Basin.

But last month, Shell signaled its investment plans could be scaled back.

"In Sichuan, progress has been slower and more difficult than we might have hoped, partly for geological reasons, partly due to challenges operating in the highly populated agricultural region," Shell chief financial officer Simon Henry told Bloomberg News.

"It's likely it will be smaller than originally envisioned," he said.

Meeting expectations

So far, shale discoveries have failed to live up to the initial enthusiasm that followed estimates by the U.S. Energy Information Administration (EIA) in 2011 that China's technically recoverable resources could be as high as 36.1 trillion cubic meters (1.3 quadrillion cubic feet), ranked as the largest in the world.

Startup costs have also been high for relatively small returns.

By the end of July, 20 billion yuan (U.S. $3.2 billion) had been invested in 54 shale exploration projects in China, according to the Ministry of Land and Resources (MLR).

Banks have been cautious about lending for the uncertain prospects, holding back until projects reach the production stage, Interfax reported.

"China's shale gas is still in the prospecting stage and there is a long way to go before commercialization, but banks are realistic," said Xu Zhonghua of China Construction Bank, as quoted by the news agency.

While CNPC officials have continued to voice confidence in their development plans, some authorities have raised doubts that the 2015 goal for China's shale gas output will be met.

"Energy consumption growth has slowed, but it is still larger than what the environment can bear," said Zhang Yousheng, director general of the Energy Research Institute of the National Development and Reform Commission (NDRC) state planning agency.

"Due to the environmental capacity, it is not possible for China to achieve the 6.5 bcm by the end of 2015 and 100 bcm by the end of 2020," Zhang said at the Asia Shale Gas Summit in Shanghai, also according to Interfax.

Previously in January, Zhang was quoted as saying that growth trends for next year were on track.

"Based on what we have achieved now in the shale gas sector, we are very confident to reach our target of shale gas output by 2015," Zhang told the official English-language China Daily at the time.

Seeking scapegoat

As prospects dim for meeting the NEA targets, officials appear to be looking for something or someone to blame.

Last month, Zhang appeared to fault the MLR for providing insufficient data to investors and project developers.

"It is not reasonable to offer blocks to companies without giving them adequate resource data and asking them to explore the resources themselves," he said.

Edward Chow, senior fellow in the energy and national security program at the Center for Strategic and International Studies in Washington, disagreed.

Chow cited the responsibility of developers to assess costs and risks, as well as the government's intention to encourage private investment, announced at the ruling Chinese Communist Party Central Committee third plenary session in September 2013.

"It seems odd to blame the Ministry of Land and Resources for unreliable reserves data and against the spirit of the supposed policy announced in last year's plenum to rely more on market mechanisms," Chow said.

"After all, it should be up to industry to determine actual reserves and the ministry to estimate potential resources," he said.

Interfax also compared the cost of gas imports from Russia with Chinese shale gas, citing figures suggesting that domestic production could be twice as expensive as Russian pipeline gas.

But Chow also took issue with the argument by the Russian news agency, which appeared to be aimed at promoting more Russian exports.

"I don't believe it appropriate to cost compare Russian pipeline gas with domestic shale gas," he said.

"The Chinese are determined to maximize domestic production. The difference between demand and domestic production will be imported," said Chow.

Second pipeline

On Sunday, Presidents Xi Jinping and Vladimir Putin witnessed the signing of a memorandum of understanding on a second Russian gas pipeline to China on the sidelines of the Asia Pacific Economic Cooperation (APEC) summit in Beijing, news agencies from both countries said.

The project would supply China with 30 bcm (1 trillion cubic feet) per year on a western route through Xinjiang in addition to an eastern route agreed in May to deliver 38 bcm (1.3 trillion cubic feet) per year.

Russia has been trying to persuade China to accept a western path from its Siberian gas fields for the past decade. Prospects for a final agreement remain unclear.

But barring a major breakthrough, the challenges to shale gas development suggest it will be less of a factor in China's drive to replace high-polluting coal with cleaner energy as it pursues its massive urbanization plans.

In April, the NDRC raised the country's gas supply target for 2020 to 420 bcm (14.8 trillion cubic feet) from the previous goal of 350 bcm (12.4 trillion cubic feet).

Although the lower forecast for shale gas could lead to a shortfall in planned domestic sources, China is expanding its import pipeline network from Central Asia in addition to signing its deal for Russia's eastern pipeline supplies by 2019.

China's apparent gas consumption last year reached 167.6 bcm (5.9 trillion cubic feet) with imports of 53 bcm (1.9 trillion cubic feet), China Daily reported in May.

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