Analysis: Shale Gas to Help Meet Chinese Future Energy Demand

Wood Mackenzie reported that unconventional gas, particularly shale, will increase significantly to help meet China's strong gas demand growth.

In its recent study, Race for Supply – the Future of China's Gas Market, domestic unconventional production will account for over a quarter of total gas supply by 2030. However, unconventional gas resources will take a significant time to develop and therefore meeting its gas demand will require China to import significant additional volumes of liquefied natural gas and piped gas, particularly up to 2020.

"Development of indigenous unconventional gas is currently slow but we forecast significant volumes of coal bed methane, coal-based synthetic gas and shale gas to enter the market, reaching over 11 billion cubic feet per day (Bcfd) by 2030," said Gavin Thompson, China Gas Study Director for Wood Mackenzie. "This will meet much of China 's incremental demand by this time. In total, unconventionals will account for over a quarter of total gas supply."

Wood Mackenzie reports that shale gas is the major growth story in China gas. "As China's national oil companies increase their unconventional gas activity, they will look for partnership and technology in the initial phase of development, creating a window of opportunity for qualified foreign players. This is a near-term window of opportunity for international oil companies to gain access to China's onshore acreage and to leverage skills honed in North America."

As part of its efforts to develop shale gas resources at home, China and the U.S. formed in November 2009 a shale gas initiative to help reduce greenhouse gas emissions, promote energy security and promote environmentally sustainable development of shale gas resources.

Through the initiative, the two countries will conduct joint technical studies to support accelerated development of shale gas resources in China. The initiative also will promote shale gas investment in China through the U.S.-China Oil and Gas Industry Forum, study tours and workshops focused on shale gas development.

The potential for gas production in the U.S. from hydrocarbon-rich shale formations, known as "shale gas" has grown dramatically in recent years due to technological advances. The development of shale gas is expected to significantly increase U.S. energy security and help reduce greenhouse gas pollution. "The United States is not alone in having significant shale gas resources. China also has sizable shale gas potential but, like in many countries, this potential is not yet well understood."

In its International Energy Outlook, the U.S. Energy Information Administration said the Chinese government's efforts to increase natural gas usage mean that development of tight gas, shale gas, and coalbed methane resources has increased in recent years. However, coal will still play a significant role in meeting China's energy needs, with the usage of coal.

Thompson of Wood Mackenzie said China's demand for LNG is driving Pacific LNG market growth. "We now forecast China LNG demand in 2020 to be 46 million tons per annum (mmtpa), up from our previous forecast of 31 mmtpa. This will expand the opportunity for LNG suppliers seeking to secure markets, particularly those in Australasia.

"However, China's LNG import growth will be mitigated by the emergence of indigenous unconventional gas. Consequently there will be a limited opportunity for some LNG suppliers to secure long term supply or risk seeing China disappear as a potential foundation buyer for their projects."

China's gas demand is forecast to rise from 9 Bcfd (93 billion cubic meters) in 2009 to 43 Bcfd (444 billion cubic meters) in 2030, a compound annual growth rate of 7.5 percent, with strongest growth pre 2020. This strong demand growth, said Wood Mackenzie, will not purely be driven by gross domestic product.

Gas demand is being driven by a number of factors, including policies to reduce the country's growing reliance oil imports. "This is important as the gas demand story is about displacing oil products, not coal, in the industrial and residential sectors. Coal continues to dominate in power, although gas will increase its market share in wealthier coastal provinces as local government supports a cleaner fuel mix. As such, we think that industry will remain the largest gas consumer in China through to 2030."

U.S. China Shale Initiative

The Chinese government is encouraging the use of more natural gas to meet its burgeoning domestic energy needs while reducing its level of greenhouse gas emissions through cleaner-burning gas and renewable energy resources. The country and its exploration and production companies are reaching out to foreign companies experienced in shale gas drilling to learn how to explore for and develop China's untapped shale gas resources.

ExxonMobil last week was reportedly in talks with PetroChina to explore for and develop an unconventional gas block in northern China. Other Chinese companies have been partnering with foreign companies to develop shale gas. In March, Shell and PetroChina's parent company China National Petroleum Corp. (CNPC) signed an agreement to develop tight gas reserves in Sichuan province in central China. Under the 30-year contract, Shell and CNPC would appraise and poetntially develop tight gas in a 4,000 square kilometer area in the Jingiu block.

In June, CNPC signed an agreement with EnCana to develop shale gas reserves at Horn River, Greater Sierra, and Cutbank Ridge in northeast British Columbia. EnCana would be operator of all developments, with CNPC investing capital to earn an interest in the assets and gain an advanced understanding of unconventional gas development through an ongoing sharing of technical knowledge.

Last November, the U.S. and Chinese governments unveiled the U.S.-China Shale Gas Resource Initiative to help reduce greenhouse gas emissions, promote energy security and create commercial opportunities for U.S. companies.

Through the initiative, the experienced gained by U.S. companies in shale gas drilling will be used to assess China's shale gas potential and promote environmentally sustainable development of shale gas resources.

China and the U.S. will conduct joint technical studies to support accelerated development of shale gas resources in China. The initiative also will promote shale gas investment in China through the U.S. China Oil and Gas Industry Forum, study tours and workshops focused on shale gas development.

"The United States is not alone in having significant shale gas resources. China also has sizable shale gas potential but, like in many countries, this potential is not yet well understood," said President Barack Obama and Chinese President Hu Jintao at the unveiling of the initiative.

The United States is a leader in shale gas technology and developing shale gas resources in a way that mitigates environmental risks. Bringing this expertise to China will provide economic opportunities for both the U.S. and China, while improving energy security for both countries and combating climate change."
 

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