Will China’s shale gas boom like the US?

Cross-posted from Kate Mackenzie at FT Alphaville.

Hardly anyone, it seems, believes that China’s shale gas efforts are going to hit paydirt any time soon.

Reuters wrote yesterday that the shale gas revolution risks ‘running further off track’ — and this is before it has even begun to produce any significant volumes.

China early this year carried out the second auction for shale gas producing licences. As Reuters notes, the first shale auction two years ago was dominated by the likes of Cnooc and PetroChina, but this latest round was quite different — none of the 19 winning bidders had drilled a shale gas well before. In fact, it was a pretty scrappy field:

The second auction attracted interest from more than 100 firms, an eclectic group that included a real estate developer, a grain trader and a tobacco dealer, lured by gas subsidies and aided by easy access to funds.

The profile of the bidders reflected both the fever pitch over shale and its potential and the government’s attempt to replicate the conditions that underpinned the U.S. shale revolution: competition among a myriad of independent drillers.

Okay it’s first important to note that it’s not quite as bizarre as Reuters are making out. At least, none of the real estate or tobacco companies actually had winning bids:

However don’t let the numerous ‘local energy investment’ winners distract you from the definite lack of experience. Reuters says these were all “freshly-formed under the auspices of local governments”. As Bernstein Research’s Neil Beveridge, Ying Lou and Lu Wang wrote in January, the experience among the winners really is nil:

While China remains too dependent on PetroChina and Sinopec for the development of its shale industry, opening up acreage to provincial governments and companies with no experience in oil and gas (coal, power) can hardly be seen as a positive. We expect new JVs to form between acreage holders and experienced oil and gas companies seeking to explore for shale in China – although this will take time.

They add:

In our view the government target of 80bcm by 2020 is unrealistic, with 30bcm being more likely.

Shale gas extraction is all about technology — it’s only relatively recently that fracking, an old extraction technique, was adapted to successfully remove shale gas. Shale gas drillers are notoriously secretive about the composition of their fluids, to the chagrin of environmentalists and some landowners. And shale extraction technology is not something Chinese firms have in abundance. For example, this is from a report in December quoting a company close to the town where China’s first shale gas wells were drilled three years ago:

“We’re just starting to understand what we need to develop shale gas,” said Zhang Mi, chairman and president of the Hong Hua Group, a manufacturer of drilling rigs based in Chengdu, a city of 14 million residents about 140 kilometers (90 miles) north of Lao Chang.

Furthermore, these successful bidders paid a high price — winners were chosen on their development plans and in total, the winners committed to spend Rmb12.8bn ($2.1bn) over three years, which Bernstein Research calculates is seven times the minimum outlay the government was looking for. Let’s think about how the risks of overpaying for assets worked out for Marius Kloppers. Or indeed, for Chesapeake, the US shale independent that ended up having to sell assets to get its debts below its market value.

Chesapeake is an interesting example. Last month it agreed to sell a 50 per cent stake in its 850,000 acre Mississippi Lime formation assets, for a price that Bloomberg calculated was only a third of the level Chesapeake had valued those assets back in July 2012.

There are certainly things that bode well for China’s shale gas prospects. The geologyappears to have plenty of potential, at least from an initial assessement by the US Energy Information Agency, which estimates 1,275tn of ‘technically recoverable’ reserves (it should be noted that category is a broad one and includes undiscovered resources). Gas prices in China are higher than in the US (for now, at least). And in terms of environmental regulations or landowner opposition, there’s probably much less for the prospective shale gas prospector to worry about than most other countries; the Chinese authorities have shown a high tolerance for environmental risk as long it brings growth. In addition, energy security is a very important goal of Chinese policy, as the country now has a massive dependency on imported coal, gas and oil.

Oh, but this — again from Reuters:

But China’s shale deposits are mostly found deeper underground than in the U.S. and reserves are more scattered, making it difficult to adapt the technology that has worked in the United States to China’s geology.

Regional and geological variance is a big risk with unconventional gas anyway; even within the US, this means approaches to extracting shale gas have to be refined for each area.

So the less-than-ideal geology could well compound the lack of expertise and technology.

But in terms of getting hold of shale technology, it’s not like Chinese firms aren’t trying. The Sinopec/Chesapeake deal was all about the technology and not the assets, according to the pundits, which makes sense.

However this is the most interesting thing to us is right near the end of the Reuters story. Western drilling giants Halliburton and Schlumberger have both made moves signalling some interest in Chinese shale, but:

… concerns over intellectual property protection for technology means U.S. firms could limit initial deals to orders of fracturing fluids and support equipment, and that the winning firms may have to rely on small, local service companies for drilling, industry experts said.

Back in 2009, Barack Obama and Hu Jintao jointly announced a US-China initiative on shale gas. One of its key goals was technical co-operation: the countries would “conduct joint technical studies to support accelerated development of shale gas resources in China”.

Yet the longstanding wariness of many foreign companies over letting their intellectual property loose in China has arguably increased a lot since 2009. Many of the increasingly common incidents of data theft originating from China target companies and their intellectual property. Just on Monday President Obama’s national security adviser, Tom Donilon, made a speech asking China to recognise the urgency of the problem and take action to stop it — which the New York Times reckons to be the first such public confrontation over cyber espionage.

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Comments

  1. We do live in interesting times. Looks like us “Cornucopians” are going to be the members of the current generation who are going to die happy.

    Here is my pick for “The Cornucopian Manifesto”:

    http://mises.org/daily/661

    • You’re off with fairies PB. Have you been to China lately?

      With their fine environmental track record this should turn out apples.

      No one is trying to repress you mate – we just don’t want our kids growing up in an open sewer.

      • Is China going to be any worse than Victorian Britain, Europe and USA, and for longer or shorter, as they too “develop” into a first world country?

        Or does the eco-Taleban insist on great masses of humanity remaining in subsistence living?

        No-one during the great waves of urbanisation of humanity, ever rounded up the rural populations and forced them into the polluted cities. They went there voluntarily to improve their lot.

        Filthy air in cities was SOLVED in the current first world, by eliminating LOCAL emissions of carbon particulates – by generating electricity by burning coal efficiently at remote locations. Google “Coal By Wire”, which is what the British Government promoted it as at the time. It solved the London smogs that were still killing people in the thousands per week as recently as the 1950’s.

        It is these local emissions of carbon particulates that are making China’s cities filthy, and building electricity generating plants is part of the SOLUTION. And the more of them that are fired by gas, not coal, the better.

        My belief is that nations that are the “last” into development will spend the SHORTEST time in the unpleasant phase, due to technology being already “off the shelf”. They already have the internet and mobile phones, for example. Imagine Victorian London with these…..

        • Very simplistic analysis of how capital manipulates labour PB. There is no rule that says we need to remake the mistakes of our past.

          And in any even what is australia’s excuse for befouling our beaches and rivers?

      • No one is trying to repress you mate – we just don’t want our kids growing up in an open sewer

        Every country that industrialised became a ‘sewer’ for an amount of time. It’s an inevitible outcome of this process.

        But is was solved, and the blue print for the solution is there to copy, thus should be quicker than devising it in the first place.

        • Really? lets talk fishery stress in all of Europe? lets talk water quality for the European river mouths? lets talk ecological diversity and un-touched wild places in the industrialised west?

          Seriously – you lot are all the same. You bitch and moan about a few rules that might stop our rivers from becoming bacteria infested toxic sludge lest it get in the way of your god given right to make a quid and yet you have sat back and let the finance houses and central banks get away with more anti-business carnage and f..k ups than a couple of greens could manage in a bloody eternity.

  2. Reisman points out the following:

    We have actually barely begun to prospect the entire surface of the earth, and under the sea bed, for all known resources.

    As mankind becomes more technically advanced, he discovers uses for more and more resources. Many of the resources we use most today, we did not use at all until we discovered how to use them.

    There is no reason to believe that we have come to an end of that process. That is, we will yet discover resources that give us even more power over our well-being than the resources we currently make use of.

    The more capital accumulated by mankind, the more access we get to resources. We can drill deeper, extract elements more efficiently, access the resources under the sea bed, and so on.

    Furthermore, that accumulation of capital underlies the research and technological progress that bring ever more resources within our purvey. And increases in productivity make incomes of all humans more capable of paying for energy.

    Apart from what has been blasted into space, every molecule in every substance “used” by man, is still here and will be able to be re-used one day; a lot of it has merely been re-ordered to man’s advantage meanwhile. Every carbon molecule that has been burnt to extract energy, returns to the biosystem after a short time in the atmosphere, and will be able to be accessed again for the purpose of energy, by our descendants at some time in the future. Currently this process takes millennia, but technology is working on speeding it up.

    It is actually more “moral” to continue to invent and innovate and adapt as rapidly as possible, and suffer possible “nature strikes back” consequences IF and when they occur (just as mankind has suffered for millennia), than it is to “play god” and do actual harm to humanity immediately, and worst of all, to reduce our ability to accumulate capital, invent, innovate, and adapt. In such cases, the “solution” is always at least as bad as the alleged “problem”, and entirely likely, going by historical example, to be far worse.

    Had our ancestors remained pagan tree worshippers, certainly the earth might be wonderfully forested and lightly populated – by primitive people living nasty, brutal, short lives; having never discovered fossil fuels or any other “modern energy”. We could replicate this scenario today, and never know what advances we DIDN’T make.

    These are actually issues of religion and ethics, not science or economics at all.

    An intense discussion of all this occurred starting from HERE:

    http://www.macrobusiness.com.au/2011/10/energy-efficiency-doesnt-work/#comment-99855

  3. I thought Marius Kloppers did very well…..for himself that is. Nevermind the shareholders.