Guest Commentary by Nick Grealy: China's Shale Gas Potential

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Nick Grealy, Director of Energy Consultancy, No Hot Air
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A fundamental question for world gas markets is the impact of China’s natural gas demand.

The rise of China has led to much speculation over the direction of oil, natural gas, coal and carbon markets.  Unfortunately, much of the theories are based on uninformed guesses or in the case of LNG marketers, fervent hopes, rather than reality.

The narrative of surging Chinese demand for natural gas has underpinned two key foundations, or fears, of European energy policy: security of supply and future prices. This narrative envisions a Europe hostage to volatile natural gas prices and possible shortage. Those fears are used in turn to provide rationalizations for investment in energy competitors as diverse as off-shore wind, nuclear, clean coal technology and LNG terminals.

In short, Chinese demand for natural gas provides an economic justification for almost every other energy source. The China story has become such an accepted part of conventional wisdom that almost no one in any industry argues against it. That could be dangerous on multiple levels.

A basic mistake would be to assume China’s affect on mineral and agricultural commodities provides a road map for a similar bull market in natural gas. The error is compounded by comparing China’s energy markets with energy markets in Japan and Korea. Japan alone bought a third of all the world’s LNG in 2011 and Korea is the second largest  consumer at 15%.  Japanese and Korean consumption of 107 and 49
BCM dwarfs China’s 16.6 BCM of LNG imports.

A key point many miss is that Japan and Korea import almost every cubic meter they burn as LNG due to almost no indigenous production. By comparison, Chinese LNG imports are only 13% of total use of 130 BCM, a far lower proportion than in Spain, France or the UK.

Further knowledge of Chinese gas fundamentals punches multiple holes in any scenario of China as LNG sponge.

1 China has significant domestic conventional gas reserves which provided 75% of total use in 2011.

  1. 14 BCM, almost as much gas as LNG imports was imported from Turkmenistan.
  2. Turkmen imports transit Uzbekistan which has the world’s largest stranded conventional gas reserves thought to be at least 2 trillion cubic metres recoverable.
  3. A gas pipeline from Myanmar/Burma is set to import 12 BCM from 2013
  4. Russia and China have agreements in principle for Russia to send eastern Siberia gas to China.  Most importantly the final decision has been delayed because China does not agree to Gazprom’s proposed oil link pricing structure.

If China is loath to pay oil linked prices for Russian gas, it is dangerous to assume they will pay oil linked prices for LNG, disrupting any remaining linkage of European LNG to oil indexed prices.  LNG imports will certainly surge as cleaner, more efficient and potentially cheaper natural gas increasingly displaces coal  in Chinese generation as we have seen happen in North America.

Another key driver to consider are the massive volumes of North American shale gas set to compete with Australian and Qatari gas for Asian markets. Japanese, Chinese, Korean and Indian companies have all made huge shale gas investments not only in the US, but of greater significance, in British Columbia. The assumption is that they do this not only for security of supply, but also to secure non oil indexed supplies. BG and Spectra for example just inked a deal to bring 50 BCM from the massive discoveries of British Columbia shale gas to the Pacific Coast in one pipeline alone. Canada has already lost Alberta conventional gas deliveries to US shales and has the prospect of even losing Quebec and Ontario contracts to cheaper Pennsylvania shale. I don’t believe that domestic US politics will prevent US gas exports even from the East Coast, but any US decision is made moot by eventual Canadian exports that while possibly subject to technical issues, are geologically, economically and politically inevitable. Note here I haven’t even mentioned the recent conventional offshore East Africa discoveries which will be targeted at the Indian market, putting further pressure on Australian and Qatari LNG.

Having studied shale’s international prospects for over four years, I’ve often noted that the question whether Europe has shale production or not is irrelevant on a global scale. Europe will certainly be using a massive volume of shale gas. They simply have to decide if it will be domestic shale gas or North American or Algerian or even Russian shale gas.

The biggest game changer in China itself, as everywhere else, is also shale gas. Late in 2011 The Rise of China and it’s Energy Implications was published by a key energy think tank at  the  Institute for Public Policy of Rice University in Houston .  Those who have depended on a China as LNG sponge analysis should be worried. Very, very worried.

Rice stated that China potentially has even greater volumes of shale gas than the United States. Similarly, the EU recent mean estimate of Total Recoverable Resources of China at 19.2 Trillion Cubic Meters means shale could supply over a thousand years of current LNG imports from shale alone.

If that isn’t a game changer enough, the Rice University High China Shale Reference predicts the unthinkable: China would have enough shale resources to export them through pipeline to Korea. This would mean substantial drops in LNG imports and a base case price estimate of $5 to $7 MMBTU worldwide.

When Italy’s ENI and Norway’s Statoil made initial shale investments in US shale a few years ago, they correctly congratulated themselves on beating even US oil majors in the race to access shale technology.  But when they eventually visited Oklahoma and Texas research labs, they found Chinese geologists already there.

Companies like CNOOC and Sinopec have already drilled more shale wells over the past year than Europe has managed in three. They predict production of 6.5 BCM , more than Portugal’s entire annual use, as soon as 2015 and a minimum of 50BCM by 2020.

China built the West East Pipeline 2500 miles to Shanghai in less than three years. They built 10,000 KM of autoroutes in five. China also delivered a High Speed Train from Beijing to Shanghai in the same period ahead of schedule and budget. That train covers a distance equal to London to Milan with a schedule of up to every 20 minutes.

It’s too early to have absolutely clear results, but for those who seek to bet against shale in China there can be only one question: Are you feeling lucky?

Nick Grealy is director of the energy consultancy No Hot Air, specialising in public perception and acceptance issues of shale energy worldwide. Born in the UK, Nick moved to New York City in his teens and lived in the United States for over two decades.

A graduate of New York University, Nick’s US based career included working for utility Con Edison, Chase Manhattan Bank North African Finance and the City of New York Home Energy Assistance Program. He returned to the UK and started a career in the UK energy industry at London Electricity, Total Gas Marketing, Energy Quote and Utilities Specialist for the Department of Health.

Describing himself as a “recovering energy consultant” who thinks the worst energy risk is getting talked into thinking you have one, he started following the shale energy revolution in 2008. First studying what he called at the time shale’s sudden emergence and future permanence he now studies shale’s impact worldwide across the energy spectrum, he has worked for private and public clients across Europe and is a frequent contributor to media while continuing to publish analysis of energy acceptance issues at http://www.nohotair.co.uk/