To be a player you have to join the game

November 1, 2010

It is perhaps the biggest social and economic challenge of the world today: how will China acquire sufficient energy resources, of oil and perhaps even more important, natural gas, over the next several decades? China’s energy makeup is still quite primitive: 70% of China’s energy comes from coal, a share that the West has not seen since the nineteenth century. This has caused chronic environmental pollution and air quality problems. Other than the contribution from the politically correct, fashionable alternatives (such as wind, touted by wishful thinkers but whose real contribution is and will continue to be miniscule), natural gas is the energy source with compelling potential for future growth in China. The trouble is that the country does not have sufficient indigenous conventional resources and will have to import, competing with other countries on the open market. Natural gas offers the only hope as a pollution-acceptable fuel for power generation and, very importantly, as a motor vehicle fuel. China uses approximately 35 times less natural gas per capita than that used in western Europe or the US – 80% of the Chinese public has no access to natural gas, either directly or indirectly. Natural gas use is already soaring. Starting from 865 billion cubic feet (bcf) in 2000, it has increased by almost four-fold to 3.18 trillion cubic feet (tcf) in 2009, and in a rapidly increasing energy consumption from all sources, gas share of primary energy went from 2% to 4%. By 2020, gas consumption will likely exceed 10.6tcf, providing about 10% of China’s primary energy. This natural gas increase, outpacing the already torrid rate of total energy increase, will last at least until 2030. The illustration shows China’s energy makeup compared with the US – China’s 3tcf of gas consumption is tiny compared to the 24tcf of gas consumed by the US. To exacerbate the situation further, in November 2009 the Chinese government decided that by 2020 total emissions of CO2 should be 40-45% less than the total amount in 2005. The key to cut emissions is to change the composition of China’s energy consumption – reduce the usage of coal and increase the usage of natural gas.

70% of Chinas energy comes from coal, a share that the West has not seen since the nineteenth century. This has chronic environmental pollution and air quality problems.

These reasons have given an enormous impetus on the Chinese natural gas business. China has been trying to put some semblance of order to the red-hot natural gas demand. While from 2000-08 China’s demand increased by an average of 16.2% per year; production increased by only 13.2% per year. At the end of 2008, natural gas proved reserves, and annual production and consumption in the United States were 237.7tcf, 20.7tcf and 23.3tcf respectively, while in China they were 86.7tcf, 2.7tcf and 3tcf. In 2009, domestic gas production in China was 2.93tcf, about 92% of total consumption. Chinese production in 2010 is likely to be increase to 3.2tcf but demand will be 4.3tcf (~25% shortage). It is expected that the gas shortage in China will be 1.1-1.4tcf in 2010, 1.8-2.1tcf in 2015, and 21 2.8-3.2tcf in 2020, or 50% of the estimated consumption . The only apparent way to meet the country’s needs is to import a lot of natural gas, most of it as LNG, other than the gas provided through Russian or other Asian pipelines. But there is a ray of hope to China and that is shale gas. But this will not come about automatically. Unquestionably, one of the biggest stories of the oil and natural gas industry in the US has been shale gas. But its success has not been replicated elsewhere, such as in Europe, although the resources are likely to exist. American can-do attitude, streamlined costs and, especially, ingenious deployment of technology, has stemmed the US gas production decline observed over the previous decade and has re-vitalized the nation’s natural gas industry. The Chinese would like to imitate this American success and in August they started a very public concerted effort by establishing a national research center for shale gas, managed by China’s ministry of land resources. As usual there have been some outrageous claims: some Chinese reports have talked of 30 trillion cubic meters (over 1000tcf) of shale gas resources. More realistic are production targets from CNPC: 500 million cubic meters (16bcf) of shale gas, and from Sinopec: 2.5bcm (89bcf) of combined shale gas and coalbed methane gas by the end of 2015. This would amount to about 2% of Chinese production. There are rumors that major US shale gas players will be invited to enter China. To what extent this happens will determine whether China will be the next big player in shale gas. The demand is clearly there. Note: Since this was written, China’s CNOOC has announced a $2 billion deal with Chesapeake for shale gas production cooperation.

Categories: Energy Asia


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