Date
21 August 2017
Cheap natural gas supply from Russia may squeeze China's shale gas production. Photo: Bloomberg
Cheap natural gas supply from Russia may squeeze China's shale gas production. Photo: Bloomberg

Russian deal to stymie China shale gas development

There’s one sector that is likely to suffer from the wider use of imported natural gas from Russia: China’s infant shale gas industry.

The move to explore the country’s immense reserves of shale gas, clustered in the southwestern and northwestern regions, is part of China’s decision to diversify its energy mix. The United States’ success in the field has spurred Beijing to boost its production of the resource.

Last year China National Petroleum Corp. (CNPC) and China Petrochemical Corp. (Sinopec Group) made breakthroughs by boosting their combined shale gas output in Sichuan and Chongqing to 200 million cubic meters, according to a Xinhua report. The two energy giants aim to ramp up production to 2.6 billion cubic meters and 5 billion cubic meters respectively by 2015.

Yet analysts say the hefty investment needed to meet the targets may be far bigger than the expected return. China’s complex geology suggests that in order to reach the underground gas fields in the western regions, engineers have to drill to a depth of 5,000-7,000 meters, compared with just 1,000 meters in the US. Other impediments include inadequate infrastructure and water scarcity (lots of water must be pumped into the ground in a drilling process called hydraulic fracturing or fracking).

The average cost of drilling at Sinopec’s Fulin base in Chongqing, one of China’s largest shale gas fields in operation, has been reduced to US$16 million per well, but that is still more than five times the cost at Barnett Shale, a major gas field in the US states of Texas and Oklahoma, the Hong Kong Economic Journal reports, citing a CLSA report.

The prohibitive cost means the private sector will not be too excited to join in the exploration and development of the fields.

Policy uncertainty is another issue. When central authorities gave their blessings to the development of unconventional resources back in 2012 with the auction of shale gas mining rights, Beijing and Moscow were stuck in a deadlock in their gas talks. As such, the move to step up shale gas development could be seen as a backup plan for the country to find alternative resources to meet future energy demand.

Now that a deal has been struck and cheap natural gas supply from Russia is guaranteed for the next three decades, Beijing can take its time in developing the country’s shale gas resources. That means it is highly uncertain whether the government will continue with its subsidies and policy incentives for the sector.

– Contact the writer at [email protected]

CG

EJ Insight writer

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