22 January 2019

Why an energy-sufficient US is good for China

Shale gas is changing the United States energy industry, putting one othe world’s biggest power consumers closer to self-sufficiency.

The quiet revolution is creating ripples across the global market. Soon, the world’s major energy producers, from Saudi Arabia to Venezuela and Russia, will have to get used to the US being one of them for good or bad.

It will be mostly good for China.

The world’s largest oil consumer has a unique chance to diversify its energy sources while strengthening its hand in price negotiations, an analyst with the Chinese Ministry of Industry and Information Technology think tank told China Central Television Finance Channel.

That will happen when the US becomes self-sufficient and starts selling excess energy in massive quantities.

With its leading-edge expertise in hydraulic fracking, an expensive, complicated process for extracting the unconventional resource from the ground, coupled with a modern exploration infrastructure, the US could produce enough natural gas to exceed domestic demand in two years, state news agency Xinhua reports, citing a forecast by the Southern Methodist University Maguire Energy Institute.

Natural gas exports by the US is a potential game changer. One immediate impact is that Russia, the world’s largest producer of natural gas, might be forced to lower its prices which would hearten China, one of its biggest customers.

Russia and China have been locked in a stalemate over pricing for more than a decade. Russia wants China to pay for its gas as much as Europe — US$400 per 1,000 cubic meters. China insists on no more than US$250 per 1,000 cubic meters.

When the US enters the global gas supply market, it could shift the dynamic toward buyers such as China which could pick its deals or negotiate prices with existing suppliers with a freer hand.

That said, Moscow and Beijing could sign a gas supply contract during a visit by Russian President Vladimir Putin in May.

Obviously, China will try to make the most of weak energy demand from the US and Europe to secure its own supply. Last year, it signed a raft of new supply and exploration deals.

Central Asia now accounts for the bulk of China’s energy sources after Beijing struck blockbuster deals in September for new gas fields and supply from Turkmenistan. Also, China National Petroleum Corp. agreed to invest US$5 billion for a stake in Kashagan, the largest oil field in Kazakhstan.

A natural gas pipeline from Burma became operational in July, cutting China’s reliance on the Malacca Strait for transporting oil.

China has done a lot to secure its energy sources but there are still some concerns.

For instance, Chinese-invested pipelines in Central Asia have formed a grid, making them particularly vulnerable to political turmoil or social upheavals in the region, according to an expert with the China Academy of Social Sciences.

Beijing almost solely relies on natural gas imports from Turkmenistan for its winter energy needs but the pipeline to China runs through three other countries — Uzbekistan, Tajikistan and Kyrgyzstan. Within China, a large part of it is in the troubled southern Xinjiang Uyghur Autonomous Region.

If any of these areas are hit by political instability or natural disasters, Beijing and several northern regions could end up without gas supply. Other oil and gas pipelines serving the southeastern coastal areas face similar risks.

In addition, China lacks a systemic strategy to leverage its status as the world’s largest energy consumer during price negotiations. Among the world’s major importers in 2012, China’s say in international crude oil pricing is too insignificant to haggle with suppliers.

At a time when China is no closer to producing its own unconventional energy resources in any meaningful quantity, many analysts are calling for an oil and natural gas futures market in Shanghai’s free trade zone to underpin indigenous benchmark prices.

– Contact the writer at [email protected]



EJ Insight writer

EJI Weekly Newsletter

Please click here to unsubscribe