China has ways to tap shale gas riches

CHINA'S aspiration for a US-style gas bonanza that will reduce its dependence on imported energy must confront three key scarcities -- water, shale gas expertise and pipelines -- before it can become a reality. 
 
As well, Chinese authorities must manage the social and environmental frictions likely to arise when drilling companies seek access to farm land and use hydraulic fracturing, or fracking -- the technique that is an integral part of shale gas exploitation.



Fracking involves injecting a mix of sand, water and chemicals into rocks deep beneath the surface to crack them open and get access to the shale.

In the US, large-scale shale gas extraction in the past five years has revolutionised its energy, transport and manufacturing landscape to the point where the US is likely to become an exporter of liquefied national gas by 2015.

Last year, for example, the US produced 220 billion cubic metres of shale gas, or more than a third of total natural gas output. Over the next two decades, shale's share is likely to rise to 50 per cent. The US Energy Information Administration estimates the country's recoverable shale gas reserves at about 14 trillion cubic metres.

Now China, with potential shale gas reserves of 25 trillion cubic metres in areas such as Sichuan province and the Tarim Basin in Xinjiang, wants to emulate the US experience, setting a goal in its latest State Council energy white paper of extracting 6.5 billion cubic metres of gas a year by 2015, and as much as 100 billion cubic metres a year by 2020.

But the US shale bonanza has been more than three decades in the making, and draws on the experience and infrastructure of a well-established oil and gas industry.

North America has thousands of kilometres of gas pipelines and receiving points, its geological survey records are extensive, its exploration companies have pioneered the key techniques of horizontal drilling and fracking, its rig crews are the best in the business and have good access to water for fracking, and there is a strong service sector covering finance, distribution, processing and marketing to support the industry. Even so, the industry has had to contend with vigorous opposition from environmental and farming groups concerned over water and land usage.

For China to achieve anything like the US success over the next decade, it will have to address these key issues. Much of its northern half is water-stressed already, while in the south, shale exploration will have to compete for water now used to grow food.

Certainly, China has the scale to be a big shale player, and state-controlled entities such as CNPC (whose listed arm is PetroChina), CNOOC, China Petrochemical Corporation (Sinopec) and Sinochem are keen to deploy domestically the shale skills that they hope to pick up from recent investments in North American shale plays and in joint ventures with oil majors ExxonMobil, Shell, ConocoPhillips, BP and Total within China.

While these technological skills are crucial, each shale gas field is unique, meaning there is no "one size fits all". That is why many of the North American fields were developed initially by smaller, independent oil and gas companies such as Devon Energy, Anadarko Petroleum and Chesapeake Energy.

When China held its first round of bidding for shale gas blocks in 2010, only six state-owned energy companies were invited to take part, and the blocks were limited to southern China, where water is more easily available than in the arid north and northwest of the country.

The second round of bidding on October 25 last year drew a much bigger field and was open to non-state players. A total of 152 bids from 83 companies were received for the 20 blocks, covering about 20,000sq km in Chongqing municipality and the provinces of Guizhou, Hubei, Hunan, Jiangxi, Zhejiang, Ahui and Henan.

Sinopec, one of the first-round invitees, began drilling China's first shale gas production wells in Sichuan province near Chongqing in June last year. Sichuan is one of China's biggest grain growing areas, and some farmers there are wary of the impact shale exploration will have on their land and water.

China is already the world's biggest energy consumer and uses a prodigious amount of domestic and imported coal and oil to run many of its power stations. It also has massive capabilities in wind, solar, hydro and nuclear power.

But it is natural gas that offers the potential to really change China's energy equation, particularly in the form of its domestic shale resources, coal-seam gas and coal-to-gas conversion. For now, much of China's gas is imported via pipeline from Central Asia or as LNG from the Middle East, Southeast Asia and Australia.

In its latest World Energy Outlook released last month, the International Energy Agency says it expects unconventional gas -- which covers shale and CSG -- to account for nearly half of the increase in global gas production out to 2035, with most of the increase coming from China, the US and Australia.

But the IEA also warns that the unconventional gas business is "still in its formative years" and that there is uncertainty in many countries about the extent and quality of the resource base, and about the environmental impact of producing this gas.

The IEA's outlook supports the view of British industry analyst Wood Mackenzie that China's shale gas development, while potentially substantial, will be a long-term story. At the World Gas Conference in Kuala Lumpur, Wood Mackenzie's head of Asia-Pacific gas research, Gavin Thompson, said the focus should be on China's gas import options to meet rapidly increasing demand. This, he said, presented opportunities for pipe suppliers in Central Asia and Russia, along with LNG suppliers.

"We remain positive that China's domestic shale gas will be a major boost to supply growth, producing approximately 150 billion cubic metres (bcm) per annum by 2030, largely accounted for by the Sichuan and Tarim basin production.

"However, shale gas growth will only accelerate after 2020, staying under 30bcm before then. Meanwhile, China's gas demand will increase from just over 150bcm to more than 600bcm from now to 2030."

Wood Mackenzie believed that both coal-to-gas projects and coal-bed methane (CBM) would each deliver more output to the Chinese gas market than shale right up to 2024.

"By 2020, we see CTG and CBM producing 27bcm and 17bcm respectively against only approximately 11bcm of shale production. These sectors are therefore far more significant through the medium-term, but are not receiving the appropriate level of attention outside of China."

Thompson said there was a need for a much deeper geological understanding of China's shale potential and the know-how to exploit it. As well, land access issues, environmental challenges, a lack of supply chain services and infrastructure, and decisions on the best allocation of capital all cloud China shale gas outlook.

China's energy white paper says the government will "actively promote" the development and use of unconventional oil and gas resources by speeding up the exploration of coal-bed gas and selecting favourable exploration target areas for shale.

By Geoff Hiscock is the author of Earth Wars: The Battle for Global Resources, published by John Wiley & Sons

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U.S. to Overtake Saudi Arabia, Russia as World's Top Engergy producer

A strategic game-changer, the Crude dynamics a new economic 'golden age' for USA likely?

A SEISMIC shift is under way in global affairs. At its most potent, this dynamic could conceivably upset the accepted wisdom of where the ‘centre of gravity’ of the world economy will lie two decades from now.

A recent report from the Paris-based International Energy Agency (IEA) predicts that by as early as 2020, the US could surpass Saudi Arabia as the world’s largest oil producer — and achieve complete energy independence by 2030.

The IEA forecasts that the US will increase its production to 23 million barrels a day (MMbd) in 10 years from total available supplies of around 10.3 MMbd currently. Oil and natural gas production in the US is increasing at its fastest pace in 50 years.

The IEA’s outlook on world energy has underscored what recent data have been pointing to: a perceptible decline in the dependence on energy imports for the US.

The US, currently the world’s largest oil consumer using 18.8 MMbd (roughly 22 per cent of global production), imported about 45 per cent of its petroleum (crude as well as products) in 2011. After peaking in 2005, the share of imports in US energy consumption has declined a full 10 percentage points (from over 55 to 45 per cent currently).

Contrary to popular perception, 52 per cent of these imports were sourced from the western hemisphere, with Canada, Venezuela and Mexico supplying 29 per cent, 11 per cent and eight per cent of the US petroleum needs.

Saudi Arabia, the second-largest supplier of oil to the US after Canada, accounted for 14 per cent of US petroleum imports in 2011. The wider Middle East/Persian Gulf accounted for 22 per cent of US petroleum imports in 2011, down by around 25 per cent since 2005.

The US has benefited from large domestic production gains, particularly in shale oil.

This has been made possible by technological innovation in oil drilling such as ‘hydraulic fracturing’ (or ‘fracking’) as well as the opening of hitherto off-limit geologically rich production areas such as Alaska and the Gulf of Mexico (drilling activity in the latter was temporarily halted by President Obama following the oil spill caused from BP’s rig).

What will this trend mean for the global economy? The virtual elimination of the US’s dependence on imported energy in the next one or two decades is being dubbed as a “strategic game-changer”. (The Wall Street Journal carried a piece with the headline ‘Saudi America’ in its Nov 12, 2012 Asian edition.)

According to influential commentators like Niall Ferguson, the celebrated financial historian and Harvard University professor, the abundant availability of indigenous energy could spark a new economic “golden age” for the US.

Uninterrupted supplies of relatively cheaper, and less price-volatile, fossil fuel could galvanise the US manufacturing sector into creating millions of new jobs.

With its productivity advantages, coupled with a gradual convergence of manufacturing wages between developed and fast-growing developing economies, the US could also start becoming attractive once again as a global manufacturing hub, according to Mr Ferguson.

Hence, rather than write off the US economy as a spent force, commentators such as Mr Ferguson believe quite the opposite: that the US will continue to economically rival, and possibly dominate, competitors such as China and India well into the supposedly ‘Asian’ century.

The replacement of imported fuel and the infusion of domestic energy in the US economy will have implications for the US dollar as well, according to this line of reasoning.

According to forecasts by Deutsche Bank, reduced energy dependence would cause the US current account deficit to fall 30 per cent by 2016.

By virtue of these developments, the value of the greenback will appreciate, which will provide an added impetus to declining world oil prices.

The possible reduction of geopolitical risk in global energy markets as a result of America’s energy ‘independence’ resulting in a weaning away from the volatile Middle East, could trigger a sharp reversal in the international oil price. (This scenario assumes, however, that Saudi oil production has not ‘peaked’ between now and then).

By some expert reckoning, the geopolitical risk in current oil prices ranges anywhere from $20 to $30 a barrel.

Such a large reduction in the oil price, should it occur, will exact a heavy toll on the budgets and economies of Middle Eastern oil producers.

Given their demographics, most of these countries will need to continue ‘pump-priming’ their economies for the next decade at least to create jobs and provide social safety nets.

The potential loss of oil income could be a devastating blow to their economies — and for millions of migrant workers who send billions of dollars in remittances to their respective countries.

The other major implication of these potential developments in global energy markets would be on food prices. If world oil prices do indeed trend down for the long run, it will remove the economic incentive for the push into bio-fuels.

This in turn will be welcome news for the world’s poor, as both the stopping of food diversion for bio-fuels combined with lower transport costs will make a significant dent in food prices.

However, if the US economy does not decline into irrelevance by 2030, and is in fact rejuvenated, the global competition for resources will be even more intense — pressuring not only the environment but also prices for non-oil, non-food commodities.

A fascinating global energy landscape is unfolding. Whatever final shape it takes, our continued dependence on energy from fossil fuels will ensure that oil will continue to play a major role in our lives for the foreseeable future.- Dawn/Asia News Network

 By Sakib Sherani
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

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U.S. to Overtake Saudi Arabia, Russia as World's Top Energy Producer

Oil derricks like this one outside of Williston, North Dakota, are part of a shale oil boom that has helped put the United States on track to overtake Saudi Arabia as the world's leading oil producer.

Photograph by Gregory Bull, AP

In an indication how “fracking” is reshaping the global energy picture, the International Energy Agency today projected that the United States will overtake Saudi Arabia as the world’s largest oil producer by 2017.

And within just three years, the United States will unseat Russia as the largest producer of natural gas.

Both results would have been unthinkable even few short years ago, but the future geography of supply has shifted dramatically due to what IEA calls America’s “energy renaissance.” To credit are the sometimes controversial technologies like hydraulic fracturing of shale and deepwater production that have enabled the industry to tap into abundant, unconventional sources of oil and gas. New energy frontiers have opened in North Dakota and Pennsylvania. (Related: “ Natural Gas Stirs Hope and Fear in Pennsylvania”)

The bottom line for the United States is fulfillment of a goal that eluded seven presidents over nearly four decades: energy independence. The U.S., which imports 20 percent of its total energy now, will be come largely self-sufficient by 2035, concluded the IEA’s annual World Energy Outlook, often viewed as the Bible of the industry. Add in Canada, which has its own unconventional production boom in Alberta’s oil sands, and the continent is set to be a net oil exporter by 2030.

“North America is at the forefront of a sweeping transformation in oil and gas production that will affect all regions of the world,” said Maria van der Hoeven, executive director of the IEA, a Paris-based organization charged with maintaining global energy security.  (Related Interactive: Breaking Fuel From Rock)

Catching Saudi Arabia

U.S. imports of oil are on track to fall from 10 million to 4 million barrels per day, Fatih Birol, IEA’s chief economist and the main author of the report, told a London news conference. However, he added, increased domestic production, including biofuel, only accounts for 55 percent of huge reduction in imported oil. The other 45 percent is due to the ramping up of improving federal fuel efficiency standards for cars and trucks.

According to IEA, by 2020, America’s oil production will reach 11.1 million barrels per day, up from 8.1 million in 2011. Saudi Arabia’s production, meanwhile, will decline from 11.1 million to 10.6 million barrels per day. The renewed U.S. reign at the top of world oil producers may be short-lived. By 2025, IEA projects, U.S. production will slip back to 10.9 million barrels per day, but Saudi Arabia’s will have increased only to 10.8 million barrels per day.

The picture on natural gas is even more dramatic. By 2015, the U.S. should be producing 679 billion cubic meters (bcm) of natural gas, up from 604 bcm in 2010. That will be enough to edge out Russia, where production will be increasing too, but projected only to reach 675 bcm in three years. By 2020, the spread between the two nations will widen, with U.S. production of 747 bcm, well ahead of Russia’s forecast 704 bcm. The U.S. should become a net gas exporter by 2020, the report adds.

No Country an Island

“The global energy landscape is changing rapidly, recasting the roles of countries and fuels,” van der Hoeven said. What is happening in North America will certainly affect other countries worldwide, she added. “No country is an energy island.” For example, as America’s need for imported oil declines, Asia is rapidly taking up the slack. The report estimates that by 2035, fully 90 percent of Middle East oil exports will head for Asia. That’s a shift that will require Asian countries to put more resources toward keeping strategic shipping routes of oil secure. “There is a major new trade axis building between the Middle East and Asia,” Birol said.

Indeed, Iraq alone will see its exports to Asia jump from 50 percent of output to 80 percent. (Related: “Iraq Poised to Lead World Oil Supply Growth, but Obstacles Loom”) The IEA reiterated its forecast last month that Iraq’s production of oil would jump from 3 million to 8 million barrels per day by 2035, helping the war-torn country leapfrog over Russia to become the world’s second largest exporter of oil, after Saudi Arabia.

Another effect of the altered energy landscape are large variances in natural gas prices. A few years ago, global prices of natural gas changed little from region to region. But natural gas prices in Europe are now five times higher than in the U.S., and Asia’s are eight times greater. However, van der Hoeven said, as more gas becomes available globally for exports, that should push prices down outside the United States, too.

Demand Still Growing

The overall demand for energy worldwide should grow by a third between now and 2035, the report said, from 12,380 million tons of oil equivalent (Mtoe) in 2010 to 16,730 Mtoe in 2035, an increase driven by the rise in living standards in China, India and the Middle East. The share of demand for energy in the developing world will jump from 55 percent in 2010 to 65 percent in 2035, powered by China, which will see its demand for energy increase by 60percent over that period. (Related: “Pictures: A Rare Look Inside China’s Energy Machine”)

Demand for energy in the mostly wealthy developed countries that make up the Organization for Economic Cooperation and Development (OECD) will essentially be flat, IEA projects. Use of coal and oil to meet that demand should drop to just 42 percent from 57 percent today.

The IEA chided world governments for failing to do enough to improve energy efficiency, saying that two-third of the economic potential to improve efficiency is not being realized. If those efficiencies were tapped, it said, total energy demand between now and 2035 could be halved, without any decline in living standards.

Globally, demand for fossil fuels will continue to grow in absolute terms through 2035, but together their total share of the energy mix should drop from 81 percent to 75 percent. Worldwide demand for oil is forecast to grow to 99.7 million barrels per day in 2035, up from 87.4 million last year, with China alone accounting for half that amount.

By 2035, the IEA said, the price of oil is expected to be $125 per barrel in inflation-adjusted terms, though the nominal price is enough to induce sticker shock in 2012: $215.

Global natural gas demand should increase by 50 percent to 5 trillion cubic meters (tcm) in 2035. Within OECD countries, gas is overtaking coal as the fuel of choice for generating electricity. In the U.S., for instance, the amount of electricity generated by coal has fallen from 50 percent to 32 percent in just a few years. Although use of coal will continue to fall in the U.S., Europe and Japan, overall demand for coal should still grow by 21 percent through 2035, because of increasing use in China and India.

particularly Germany and Japan, are cutting back on nuclear power in the wake of the 2011 accident at Japan’s Fukushima Daiichi nuclear plant, nuclear power is still expected to account for 12 percent of global electricity generation by 2035, thanks to increased use of nuclear power in China, Korea and Russia.

Electric generation from renewables should grow from 20 percent in 2010 to 31 percent by 2035, IEA projects. Within OECD countries, most of that growth comes from increased wind energy production, while in non-OECD countries, hydro power is the main source of clean energy. Growth in demand for renewables, including biofuels, are still largely driven by government subsidies, the report said. Last year, those subsidies totaled $88 billion, a 24 percent increase from 2010.

Overall demand for electricity will skyrocket by more than 70 percent by 2035, reaching 32,000 Terrawatt hours (TWh), with almost all that increase coming from non-OECD countries, with China and India alone accounting for half of it. Prices for electricity overall should increase 15 percent by 2035, but some regions will pay much more than others. In the U.S., for instance, average household electricity prices in 2035 should be around 14 cents per kilowatt hours (kWh), while Europe’s will average closer to 25 cents per kWh. That big difference in the cost of electricity will likely give American industry a competitive advantage over European rivals, Birol said.

Amid its forecast for rising energy demand and production, the report, unsurprisingly, does not paint an optimistic picture of efforts to contain greenhouse gas emissions. IEA projects that energy-related carbon dioxide emissions will rise from an estimated 31.2 gigatonnes (Gt) last year to 37 Gt in 2035, which could cause a long-term average temperature increase of 3.6 degrees Celsius. In a nonbinding accord signed in 2009 in Copenhagen, nations agreed that the scientific view was that the temperature rise should be limited to 2 degrees Celsius, but efforts to forge a global agreement to cut fossil fuel emissions have been unsuccessful. (Related: “IEA Outlook: Time Running Out on Climate Change

This story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.

Sources: Thomas K. Grose in London  For National Geographic News

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