This is one area where China won’t beat America anytime soon

From Benjamin Haas at Bloomberg:

China has revolution envy.

The world’s largest energy consumer wants a natural gas boom to match the speedy transformation in the U.S., where shale gas production more than quadrupled between 2007 and 2012. President Barack Obama singled out the fuel in his State of the Union speech last month, saying, “Today America is closer to energy independence than we have been in decades. One of the reasons why is natural gas.”

It’s an enviable position to be in, and one potentially within China’s reach. The Middle Kingdom has all the essentials to replicate America’s coup: the world’s largest reserves — twice the U.S.’s, little public backlash against drilling, support from the leadership and a ready market. Its major cities are choking on air pollution, and could benefit from a fuel that burns cleaner than coal.

You’d think all it needs is to flip a switch.

All the Shale in China

In a five-year economic road map through 2015, China set a target of 6.5 billion cubic meters of shale gas production a year. The country’s two largest oil and gas companies, China National Petroleum Corp. (CNPC) and China Petrochemical Corp., expect to produce less than half of that by 2015 — about 3 billion cubic meters. (They are each targeting 1.5 billion.) By comparison, the U.S. produced about 266 billion cubic meters in 2012.

China would need to invest about $350 billion if it wants to meet a 2020 target of 60 billion to 100 billion cubic meters annually, said Damien Ma, a fellow at the Chicago-based Paulson Institute.

“China’s had a bit more success in recent years, but they won’t hit the pretty paltry 2015 target,” Ma said. ¬†“If we’re using the U.S. as the standard by which to judge China, then they won’t get to that level by 2020 at the earliest.”

‘A Delicate Situation’

This winter natural gas shortages hit China as it tried to cut coal use to fight air pollution. Beijing, which is chronically enveloped in a thick cloud of pollution, will replace coal-fired power and heating plants with natural gas by the end of the year in a bid to reduce toxic smog, according to the state-run China Daily.

The country imports gas from Turkmenistan, Kazakhstan, Australia, Qatar and Yemen, which together accounted for almost a third of China’s gas consumption last year, an increase of 25 percent over 2012. Consumption is expected to rise another 11 percent this year.

Imports have a downside. Dependence on trade partners for energy creates risk that geopolitics will interfere with a steady supply and predictable prices. China began negotiating a natural gas deal with Russia in 1997. Talks have repeatedly stalled as both sides failed to agree on price. Russia’s role as a supplier to Europe has been fraught in recent years. In 2009, it cut off gas supplies to Ukraine and parts of southeastern and central Europe over a price dispute.

“There’s the calculation that the Russians can play the Europeans against the Chinese for gas prices,” said Xizhou Zhou, a director at IHS CERA focusing on China and energy. “At the same time, Russia is looking around and they see there’s a lot of gas out there that China can tap into in the long-term, so it’s a delicate situation.”

The U.S. might be no more attractive an option for China if it increases gas exports to Asia. China already prefers overland pipelines to liquefied natural gas shipped by boat, and is even less keen to cede even a modicum of political leverage to its biggest rival.

“China may feel that relying on the United States for gas supplies would further reduce its already limited leverage,” Ma, wrote in a recent report. “Virtually all the countries from which China receives gas are essentially resource states that would not be able to exert much political and economic leverage over China.”

Starting a Boom Isn’t Cheap

High costs and price controls are other hurdles in the way of Chinese shale gas development. A single shale gas well in China costs about $15 million, according to economists at China National Offshore Oil Corp. That compares with a cost per well of about $2.3 million in Arkansas’s Fayetteville shale of the U.S. The price difference is mainly attributable to more complex geology found in China.

“Shale in the U.S. is like the surface of a table, flat and in one continuous piece,” says Scott Stevens, co-author of a report prepared for the U.S. Energy Department on shale gas projects in China. “Most of the rest of the world looks like a Texas chainsaw murderer went after that table and cut it into hundreds of pieces.”

The majority of China’s shale basins lie beneath mountainous terrain in the country’s southwest under terraced rice and tea plantations. More reserves are in deserts in the northwest province of Xinjiang, where water is scarce. Shale gas wells in Pennsylvania’s Marcellus shale need an average of 5.5 million gallons of water per well. It’s unclear how much water will be required in China, and if it’ll be available.

In addition, current regulations dictate that all gas be sold at the same price as conventional natural gas, which is cheaper to produce. CNPC researchers say the company could lose about 0.6 yuan (about $0.10) on each cubic meter of gas sold under the current system.

China also lacks a pipeline network to move gas to homes, factories and power plants.

Fracking America

China’s big oil companies are buying stakes in shale assets abroad, a good investment and a way to develop expertise. In 2012, PetroChina Co., a unit of CNPC, bought shale gas assets in Canada from Encana Corp. for $1.2 billion, and a stake in Royal Dutch Shell Plc’s Groundbirch project in British Columbia. Cnooc Ltd., China’s biggest offshore oil and gas producer, spent $15.1 billion in 2013 to buy Canada’s Nexen, which included shale gas operations.

They have little to show for the money spent so far. The producers can’t move the actual gas they’re developing across the ocean; there aren’t enough approved export terminals. And expertise gained in North America hasn’t yet paid off in a domestic boom. Chinese companies drilled about 150 appraisal wells in 2013 with mixed results, according to estimates from Sanford C. Bernstein.

The U.S. drilled 30,000 shale gas wells last year. Such a feat is a long-way off for China. Right now, what Chinese business and political leaders know is that the right motivations and all the shale in China aren’t enough to build a boom. Not yet.

More on China and natural gas:

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