Beijing's Problem With Shale

2012-10-25

Natural gas is often seen as an ideal option to optimize China's unsustainable energy mix. Gas could improve the country's environment because of its lower air pollution and carbon emissions. Abundant domestic gas supplies could also make the country less dependent on energy imports, a longstanding goal of Beijing. Demand for gas is planned to grow to 260 billion cubic meters by 2015, up from 108 in 2010, an astonishing annual growth rate of almost 20%.

But since gas production increased by only 14% a year between 2006 and 2010, China needs to either quickly ramp up its domestic gas supply or increase its gas imports. That domestic supply is greater than is generally believed, given common story lines about how China lacks energy resources. According to the U.S. Energy Information Administration, China has more technologically recoverable shale gas than any other country in the world, enough to fuel the entire Chinese power sector—the largest in the world—for 30 years.

This is inspiring Beijing to dream of a U.S.-style shale gas revolution for China. Shale gas supplied less than 2% of U.S. gas output in 2000, but 10 years later it reached 23% and is projected to account for 49% by 2035. America's dependence on imported oil as a percentage of national consumption has rapidly diminished from 60% in 2005 to slightly over 40% today.

To gain access to state-of-the-art shale gas technology, both China National Offshore Oil Corporation and Sinopec have recently made strategic investments in North American shale gas assets. At home, after a rather disappointing round of bidding for shale gas drilling rights in June 2011, when only six state-owned companies were invited to participate, the Ministry of Land and Resources announced last month the second round of bidding. Realizing that America's shale revolution has been powered by small- and medium-sized enterprises instead of Big Oil, Beijing also is allowing Chinese private enterprises and Sino-foreign joint ventures (as long as they're controlled by Chinese parties) to bid.

But China is hardly on track to replicate America's success. Several factors still threaten to trip up Beijing's efforts to bring the shale revolution to the Middle Kingdom.

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