The shale gas revolution is about to hit China

The shale gas revolution is about to hit China

Shale gas extraction shows promising signs in China. The current 5-year plan aims to produce 60-100 billion cubic meters by 2020, so look for a more cohesive Chinese approach to stimulating shale gas production over the next coming years.

The extraction of gas and oil from shale rock formations in the United States has resulted in an energy boom that has propelled domestic production and reduced reliance on energy imports. An International Energy Agency report forecast the U.S. overtaking Russia as the world’s top oil producer, thanks in part to the gains made in shale oil extraction. Gas production has also soared, with 39% of total dry natural gas production in the US last year coming from shale gas.

As traditional wells yield less supply, shale fields have become the industry’s future source of production growth. Shale refers to the sedimentary rock formation in which oil and gas deposits become trapped. Techniques like horizontal drilling and hydraulic fracturing have allowed energy companies to extract the resources trapped in the rock and bring it the surface. According to the U.S. Energy Information Administration (EIA), currently only the U.S. and Canada produce “commercially viable natural gas” in quantity from shale. However, many other countries are pursuing this technology, seeking to develop their own shale oil/gas industries.

The shale gas dragon

While the focus remains on the United States, China actually possesses more technically recoverable shale gas resources, with 1,115 trillion cubic feet (Tcf) against 665 Tcf in the United States. At present, less than 1% of China’s natural gas production comes from shale, but the government is seeking to expand development. Its 2011-2015 five-year plan set a goal of producing 60-100 billion cubic meters by 2020.

Chart for Shale in China

China has significant shale gas resources waiting to be extracted.

The EIA views this goal as probably unachievable but notes that leasing and exploratory drilling have begun at a couple of shale fields. In its June 2013 assessment, the EIA pointed to lower domestic capability in horizontal drilling compared to the U.S. as well as less favorable geologic conditions (more fault lines within the oil/gas fields). Accordingly, “significant commercial production appears some years in the future.”

When commercial production does become viable, China will have a powerful resource base to fuel its growth. Having a large domestic energy supply can help insulate a country from price shocks. While oil prices are usually heavily intertwined with global supply and demand, gas prices can be a different story because “markets for natural gas are much less globally integrated than world oil markets.” This has contributed to the fall of gas prices in the U.S. As China has sought to gin up domestic consumption, lowering energy prices for consumers will assist in channeling spending toward services oriented sectors.

Additionally, the South China Sea has seen increasing maritime tension as China presses territorial claims over other Southeast Asian nations. Many shipping routes flow through areas like the Straits of Malacca, and if tensions ever escalated to a point that shipping was diverted, China would likely desire a strong domestic energy base. Look for a more cohesive Chinese approach to stimulating shale gas production over the next coming years. Already the US has seen the benefits of its shale energy boom, leading to improvements in its trade deficit and strategic position. Similar gains by China through the recovery of shale resources would strengthen China’s position in Asia and globally.

About Author

Ned Pagliarulo

Ned Pagliarulo works for a Japanese press company, reporting on economics and government statistics. Ned received a BA in History with a minor in Japanese from Georgetown University in 2012.