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çÁÌÉÎÁ óËÒÑÂÉÎÁ: Shale Revolution Prospects and Problem of China Power Industry
By M.C. Scryabina[1]
Considering the successful experience of the USA Shale Revolution, China also views the prospects of large-scale developing its world biggest shale gas resources. This might result in another Shale Revolution, this time in the Asian region. Development of shale gas would help Beijing to reduce its dependence on external energy markets, to increase its energy security, as well as to reduce air-polluting discharges. However there are doubts as to whether the American shale gas extraction technology is applicable in China. Besides, this raises a lot of concerns among environmentalist admitting that the use of the shale gas extraction technology may further aggravate the climate change problem.
High rates of GDP growth in China are being accompanied with an even rapider increase in the demand for energy resources and electric power. The reason is huge losses in energy production and consumption, i.e. low energy efficiency[1]. China surpassed the United States to become the world`s biggest consumer of energy resources[2] in 2009.
Only a decade ago China`s energy consumption stood at only 50% of U.S. indicators. That was a milestone event, especially as the U.S. had been the leading energy consumer since the early 20th century[3].
Natural gas accounts for 23.21%[4] of the world energy consumption. China lags behind developed states in terms of the natural gas share in the national fuel balance - natural gas accounts for only 4% of energy resources consumed by China[5]. Gas is a purer resource as compared with crude and especially coal. The shift of power plants to gas has a number of advantages:
- firstly, capital investments in new-generation and combined-cycle gas turbines are regularly lower than in coal plants and their efficiency ratio is much higher;
- secondly, gas power plants are built nearly twice quicker;
- thirdly, lesser use of coal reduces the strain on railroads, which are overburdened with coal transportation in China;
- fourthly, replacement of coal with natural gas in the fuel balance will improve energy efficiency parameters of the Chinese economy.
Natural gas production in China has more than tripled for the past decade, from 30.3 trillion cubic meters in 2001 to 102.5 trillion cubic meters in 2011. Gas consumption for the same period has grown almost five-fold, from 27.4 to 130.7 trillion cubic meters[6]. Natural gas consumption in China has been growing particularly rapidly: 21.5%[7] in 2011. The 12th five-year plan (2011-2015) is setting the task of doubling the natural gas share in the Chinese energy balance.
Mr. Liu Tienan, Head of the National Energy Administration of the China National Development and Reform Commission said on October 25, 2012, that natural gas consumption would double to 260 billion cubic meters[8] by the end of the 12th five-year period and its share in the energy balance would grow from 3.9% to 8.3%. Only 120 billion cubic meters of gas would be produced locally.
The Sichuan province is the main producer of natural gas in China. The rest is mostly casing head gas from oil fields. Systemic survey of gas fields started only in the 1990s; it is in progress on the Ordos and Tarim plateaus. Gas production may later enlarge on the shelf of the South China Sea. Shelf survey and production are insignificant now because the fields are located in territories disputed between Japan and China. Until recently bigger imports of pipeline and liquefied natural gas (LNG) were the focus of broader natural gas uses.
Construction of gas pipelines
Beijing has managed to build a number of large gas pipelines and to sign corresponding long-term contracts. Primarily, there is the Central Asian gas pipeline, which starts in Gedaim on the Turkmen-Uzbek border, goes through central Uzbekistan, southern Kazakhstan and Horgos in the Xinjiang Uyghur Autonomous Region and connects the major domestic gas pipeline of China, "West-East". It delivers natural gas from Turkmenistan and Kazakhstan. The imports were supposed to reach 40 billion cubic meters[9] in 2011 with the gas pipeline capacity enlargement to 55-60 billion cubic meters per annum[10]. The project gave a boost to China`s cooperation with Central Asian republics in the survey and development of gas fields. The weak point is that the project goes through several transit countries and the troubled Xinjiang Uyghur Autonomous Region, which creates a risk of supply disruptions.
Another large international energy import project of Beijing is the construction of oil and gas pipelines from Myanmar. The gas pipeline with the annual capacity of 12 billion cubic meters of gas is due to be commissioned in 2013. It will go from Kyaukpyu in southern Myanmar through south China provinces Yunnan and Guizhou, Chongqing and the Guangxi Zhuang Autonomous Region[11]. The project will cut the delivery time as compared with shipping through the Strait of Malacca. Gas will be supplied from CNPC fields in Myanmar. There are doubts about the sufficiency of appraised reserves for keeping the gas pipeline running at full capacity. In the opinion of specialists of the International Energy Agency (IEA) and Chinese experts, the deliveries will not be larger than 4 billion tons per year at the beginning[12]. `
Liquefied natural gas (LNG) imports
China National Petroleum Corporation (CNPC) and China National Offshore Oil Corporation (CNOOC) have built several LNG terminals in the provinces Liaoning, Jiangsu, Zhejiang, Fujian, Guangdong and the city Shanghai. China mostly meets the domestic gas demand through supplies from the Asia Pacific region - Indonesia, Malaysia and Australia. Most of the LNG supplies come to the southern provinces Guangdong and Fujian, which boast high industrial growth and can afford buying LNG, which is more expensive than coal. There are gas distribution programs in the biggest cities, among them Shanghai and Beijing. All power plants in Beijing were switched to natural gas during the Olympic Games 2008. By 2015 Beijing intends to raise the natural gas share in its energy balance to 20%, and there are even higher targets: 22% for such an industrial and polluted city as Chongqing (gas accounted for only 12% in the Chongqing energy balance in 2011). Hong Kong is also expected to increase the gas share in its energy balance to 50% by 2015. Yet the Fukushima NPP accident and the consequent drop in atomic energy generation caused a hike in LNG prices and made the imports extremely unprofitable. LNG prices in Asian markets are twice as high as the LNG prices in European markets now[13].
So, the wish to enlarge natural gas consumption has made China the world`s biggest importer. In spite of latest diversification of gas supplies, there are certain risks and dangers to the country`s energy security in its reliance on imports. The search for domestic alternatives to the imports, such as shale gas projects, has been put on the agenda.
The Shale Revolution in the United States has significantly cut domestic gas prices and reduced dependence on imports, which suggested that China may follow this example. Yet active development of the new industry causes questions and concerns, especially in the community of environmentalists. Advantages of large-scale shale gas production are obvious:
- higher levels of energy security and stability of energy supplies;
- reduction of energy imports;
- reduction of hydrocarbon discharges into the atmosphere with the lesser use of coal as primary energy resource (studies of the Massachusetts Institute of Technology showed the use of shale gas in the United States cut hydrocarbon discharges by 8%[14]);
- large-scale production of shale gas in remote provinces of China.
At the same time, production of shale gas with the available technologies is fraught with certain risks, primarily ecological problems and damages from hydraulic fracturing, which are a subject of heated debates in the United States and a cause of the moratorium set in several states of the country.
Forecasts and shale gas reserve appraisal for China
According to the latest data of the China Natural Resources Ministry, the country`s shale gas reserves amount to 134.4 trillion cubic meters, and 36.1 trillion cubic meters or approximately 20% of the world`s total are minable. China tops the world list; it is ahead of the United States, Argentina, Mexico and South Africa[15].
Chart 1 World shale gas reserve estimates Shale gas reserves Canada 11.0, U.S. 24.4, Mexico 19.3, Bolivia, Brazil 6.4, Paraguay, Chile, Argentina 21.8, Sweden, Norway, Denmark, the UK, Poland 5.3, France 5.1, Ukraine, Libya 8.2, Algeria 6.5, Pakistan, India, China 36.1, Australia 11.2, South Africa 13.7 France 5.1 - appraisal of minable shale gas reserves in trillions of cubic meters for particular countries Existent basins with appraised reserves Existent basins with non-appraised reserves Surveyed countries Non-surveyed countries Source: US Energy Information Administration Source: IA Regnum website available at http://www.regnum.ru/showpicture/?id=1572340&pic=1
Shale gas survey became a primary area of China`s energy policy. Mr. Wen Jiabao, the China`s State Council Premier, declared the priority at the fifth session of the eleventh congress of the Chinese parliament on March 5, 2012.[16], while the energy plan for the 12th five-year period set the task of accelerated development of the shale gas industry in the top line of the section dedicated to domestic energy survey and production[17].
On March 16, 2012 the China National Energy Administration published The Shale Gas Industry Development Plan for 2011-2015, which said China`s shale gas output must reach 6.5 billion cubic meters by 2015[18]. The plan said that 600 billion cubic meters of shale rock and 200 cubic meters of minable shale gas resources will be surveyed within the next four years. Nineteen mining areas will be created. National Energy Administration representatives hold a press conference dedicated to the report posting that shale gas production might reach 60-100 billion cubic meters by 2020[19].
Many experts have doubts about feasibility of these tasks and prospects of large-scale shale gas production in China. To a large extent, it is related to significant differences between geological characteristics of shale gas fields in China and the United States. Besides, the depth of shale gas deposits is bigger in China, which may have a serious effect on production costs and industry profitability[20]. Besides, China`s goal looks extremely ambitious as only 20 fields are being surveyed and developed right now[21] and it would be premature to express confidence about future plans.
Cooperation with foreign companies
There have been two tenders for development of shale gas deposits in China by now. The Ministry of Land and Resources held a tender for four blocks in the Sichuan province in June 2011 but only two bids of the China Petrochemical Corporation (Sinopec) and Henan Coal and Chemical were accepted and development licenses were issued. Foreign companies were not eligible for direct participation in the tender; these were permitted only to set up joint ventures and render technological services. The second tender was held in 2012 for deposits in the Sichuan province; this time both, state and private companies as well as joint ventures with foreign capital were allowed to make bids[22].
The CNPC subsidiary formed for foreign operations, PetroChina, signed the first shale gas development contract with Royal Dutch Shell in March 2012. Another major Chinese energy corporation, Sinopec, is considering options of cooperation with the U.S. leading shale gas developer, Chesapeake Energy. CNOOC already has two joint ventures with Chesapeake Energy. Back in 2010 CNOOC acquired 33% interest in a Chesapeake deposit, Eagle Ford, for $1.1 billion. Later on it acquired 33% in the Niobrara field in the Colorado state for $1.3 billion. In the middle of 2011 Sinopec concluded a deal with Chesapeake`s rival, Devon Energy, to obtain an interest in two fields in Ohio and three fields in Louisiana, Oklahoma and Michigan[23]. The U.S. media said CNOOC could also acquire a large stake in shale gas fields in Texas[24]. Obviously, Chinese companies are investing in projects in various regions having different geological characteristics.
Obstacles to industry development
Development technology problems. The hydraulic fracturing technology, which is currently in use, causes criticism and numerous objections of environmentalists in the United States and worldwide. They use water mixed with sand and active chemical agents for hydraulic fracturing; the mixture is squeezed underground and softens slate to release shale gas. The sand and chemicals are left underground while the water mix is pumped out. Even in the United States, which, unlike China, has rather developed environmental protection laws and an influential environmental control body, åòá (Environment Protection Authority), environmental risks related to shale gas production are not regulated by law. To large extent this may be due to the fact that developers are not eager to share information about production technologies. Chinese environmental laws and institutions are even less developed and in the case of massive use of hydraulic fracturing technology the environment may sustain serious damage.
Certain experts in China warn that the shale gas production technology may be not applicable in China (among them the Carnegie-Tsinghua Center for Global Policy`s Wang Tao[25]), as most of the deposits are located in remote highland areas. A center studying the hydraulic fracturing technique has been established in Sichuan, a province possessing substantial shale gas reserves. China has taken notice that shale gas production with hydraulic fracturing in the United States led to seismic activity (a 4.0 magnitude earthquake in Ohio on the Eve of the New Year 2012[26]). This creates especially high risks to the Sichuan province where earthquake killed almost 70,000 people in 2008. Scientists believe that seismic activity is triggered by pumping vast amounts of water underground. A serious shortage of water, which is one of the most pressing problems, creates additional impediments to shale gas production in China.
Meanwhile, industry development advocates indicate that production technologies are developing rapidly. For instance, there are methods to clean water after the extraction of gas and to use less toxic chemicals[27]. Nevertheless, there have been numerous cases of drinking water pollution with chemicals penetrating into subterranean waters, alongside a danger of subsidence. Methane discharges cause even bigger fears. Research done at the U.S. Cornell University shows that such discharges may be dozens of times more dangerous than discharges of carbon monoxide. They cause an atmospheric discharge of 20-25 times more thermal pollutants[28]. Infrared monitoring of shale gas production displayed 40-60% larger discharge of methane than it happens in the production of traditional gas[29]. Therefore, shale gas production may seriously aggravate environmental problems of China and accelerate global warming.
Domestic problems of the shale gas industry development. Successful development of the shale gas industry will require liberalization of gas prices, which are currently determined by the government and prevent enterprises from being self-sufficient. The gas production and refinery industry are extremely monopolized; same as it is in the oil sector, it is dominated by the "troika" of state-run companies, CNPC, Sinopec and CNOOC. The lack of competition may have a negative effect on optimization of costs and adoption of new mining technologies, as well as cause other misbalances. The creation of a spot market is a lengthy process, which requires substantial legislative amendments.
No less important is liberalization and competition in the mining industry. In the past it was a key factor of the development of the American gas market, in which private companies are shale market leaders. Internal conflicts between competing energy sectors, primarily the resistance of the coal mining industry the United States has encountered, is also possible. In China the coal mining industry has traditionally had the strongest position in the energy sector as the main source of fuel for the economy. A short time ago Chinese specialists focused on the development of "pure coal" technologies (synthetic oil produced in coal burning) for lowering the ecological strain while preserving the coal dominance in the energy balance. The coal mining giant, Shenhua (the biggest coal mining corporation not only in China but also in the whole world), invested a lot in the development of that technology and built a plant to make coal-based synthetic fuel near Baotuo in the Inner Mongolia. Although the technology has not been commercialized one should not expect Chinese coal miners to yield their position easily.
Production costs are one of the main obstacles to the shale gas industry development. There is no data regarding China shale gas production costs, but Academician A.N. Dmitriyevsky estimates U.S. shale gas production costs at no less than $150 per 1,000 cubic meters. "There are also a number of technical peculiarities that do not allow shale gas to become a full alternative to regular natural gas. For instance, it cannot be transported to long distances and the fields run out quickly," A.N. Dmitriyevsky said[30].
Some researchers think that shale gas costs are hardly lower or maybe higher than coal production costs, considering the entire cycle from mining to burning[31]. An indirect evidence of unexpected production costs is that the U.S. industry leader, Chesapeake Energy, has reached a brink of bankruptcy (the company is lacking $7 billion)[32]. Exxon Mobil has also recently had to abandon plans of shale gas production in Hungary and Poland due to the high production costs.
International debates on the use of the hydraulic fracturing technology. In the opinion of experts of the Massachusetts Institute of Technology, the use of shale gas is a transitional stage of evolution towards a better energy balance, which will be dominated with "pure" resources. Prioritizing and subsidizing of shale gas production may push aside technologies, that are more expensive so far but have brighter prospects[33].
U.S. opponents of the shale gas industry usually refer to the study of R. Howarth from the Cornell University, which shows that the shift to shale gas will only worsen the situation around atmospheric discharges. He thinks the use of shale gas will increase greenhouse gas emissions by 20% in the next 20 years as compared with coal, while the indicators will be equal in the 100-year prospect[34]. This means shale gas has no comparable advantages over coal.
U.S. citizens living close to shale gas production areas have launched numerous complaints about eye irritation, nausea, respiratory diseases and other health problems[35]. As a result, a shale gas production moratorium has been enacted in the states of New York, Connecticut and New Jersey and serious debates go on in Maryland, Virginia and the main shale production center - Pennsylvania[36].
New Jersey, which borders on Pennsylvania, has banned processing of hydraulic fracturing waste. The hydraulic fracturing technology has been outlawed in France, Romania and Bulgaria due to high environmental risks. Therefore, it would be premature to say whether shale gas may become a real alternative to coal, which provides 70% of the Chinese energy balance. This path will force China to invest a lot in more environmentally friendly technologies of shale gas production and to make relevant adjustments to environmental protection laws. According to the China Ministry of Land and Resources website, China will start active shale gas production only by 2020 (it gives some time to gas exporters, Russian Gazprom among them). Discussions of the possible shale gas revolution in China delay a long-term deal with Gazprom, but Beijing still needs additional foreign gas sources to accomplish the task of its higher share in the fuel balance.
Even if Chinese corporations manage to start shale gas production, which, as we have mentioned above, will not happen in the near future, they will still be unable to eliminate the now existent misbalances and problems in the energy sector, which cannot be removed without some pricing reform and competition. Such drastic changes need time. Besides, the Fukushima accident caused rocketing demand for LNG in Asia, which doubled the price at the Asian market compared to that in Europe. This is a favorable moment for Gazprom to sign a gas contract with China. But there must always be an alternative at negotiations with China. In case of gas exports, the best optional version is the construction of ports for LNG exports from the Russian Far East to the Asia Pacific region. That would allow Russia to reduce dependence of gas exports on China and occupy a certain business segment at Asian LNG market. According to G.A. Ivashentsov, Deputy Director of the Russian Center for APEC Studies, China, Japan and Korea will be consuming 50% of the world`s total energy resources by 2020. It is a task of Russia to enlarge gas deliveries to the Asian markets to 20% by 2020[37] .
Shale Revolution Prospects and Problem of China Power Industry .
By M. Scryabina
Summary: The remarkable results of the USA shale gas revolution have provoked a huge interest in Chinese energy circles. Beijing seriously considers the prospects of developing its abandoned domestic shale gas resources, which might result in a second "shale gas revolution", this time in Asian region. Developing shale gas would help Beijing to bridge the gap between energy consumption and supply, and would also create a viable alternative to coal. However, the technology of shale gas extraction (hydraulic fracturing) is highly controversial, and raises a lot of concerns among environmentalists. "Fracking" has already been banned in a number of European states and there, and is a subject to moratorium in US states of New York, Connecticut and New Jersey. The key question is whether China can successfully adapt the extraction technology to its geologic conditions, and most importantly whether "fracking" of shale gas will help to alleviate the environmental degradation caused by rapid GDP growth, and help to increase energy security of Chinese economy.
Key words
China, USA, energy security, shale gas, natural gas, hydraulic fracturing, "fracking", gas pipelines, liquefied natural gas (LNG), CNPC, CNOOC, Sinopec, Chesapeake Energy, Devon Energy, gas drilling, Sichuan province, environment, methane, moratorium on "fracking"
[1] Marianna Sergeyevna Skryabina - junior researcher, Center for East Asia and SCO Studies at the Institute for International Studies of the MGIMO (U).of the MFA of Russia.
Notes
[1] According to the Economist Intelligence Unit, China spends six times more energy in producing a GDP unit than Japan. (China Energy: Gaining Energy/Economist Intelligence Unit, 30th October,2012,Link:http://viewswire.eiu.com/index.asp?layout=ib3Article&article_id=119745196&pubtypeid=1142462499&country_id=1800000180)
[3] China surpasses U.S. in energy consumption/USA Today, July 19, 2010. - Link: http://content.usatoday.com/communities/greenhouse/post/2010/07/china-surpasses-us-in-energy-consumption/1#.UJnRoIZSRSQ
[4] British Petroleum World Energy Review 2011. [BP Statistical Review of World Energy], June 2012, p. 42. Link:http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2011/STAGING/local_assets/pdf/statistical_review_of_world_energy_full_report_2012.pdf
[5] Idem, p. 22
[6] Idem, p. 23
[7] Idem
[8] Natural gas consumption in China will grow to 230 billion cubic meters by 2015. [??2015?????????2300????], Chinese page of the Reuters website, October 26, 2012. Link http://cn.reuters.com/article/chinaNews/idCNCNE89P04C20121026?sp=true
[9] China Gas Pricing and Regulation. China`s Challenges and IEA Experience, the International Energy Agency, 2012, p.22.
[10] China is preparing to push Gazprom out with Central Asian gas. RBC, August 29, 2011. Link http://top.rbc.ru/economics/29/08/2011/612666.shtml
[11] Bridge on Lancang River completed for Myanmar-China gas pipeline, Xinhua news agency, October 24, 2012. Link http://news.xinhuanet.com/english/china/2012-10/24/c_131928121.htm
[12] China Gas Pricing and Regulation. China`s Challenges and IEA Experience [Electronic Resource]// International Energy Agency. 2012. - p.27. - Link: http://www.iea.org/publications/freepublications/publication/ChinaGasReport_Final_WEB.pdf
[13] Russia stakes on gas and oil supply to China and Japan ("Le Figaro", France) [online resource] // InoSMI, September 5, 2012. Link http://inosmi.ru/russia/20120905/198650080.html
[14] The Future of Natural Gas [Electronic Source] // M.I.T., June 10, 2011. - Link http://mitei.mit.edu/system/files/NaturalGas_Report.pdf
[15]The world on the verge of Shale Revolution. China. September 19, 2012. Link http://www.kitaichina.com/se/txt/2012-09/19/content_484011.htm
[16]Transcript of the government performance report of Chinese State Council Premier Wen Jiabao at the Chinese parliament session [????????????????????(??)] http://www.chinanews.com/gn/2012/03-05/3718461_5.shtml
[17] Wen Jiabao opens State Council meeting devoted to the energy plan for the 12th five-year period. Renmin Ribao website. October 25, 2012. [??????????????. ????????"???"??], Link http://politics.people.com.cn/n/2012/1025/c1024-19377787.html
[18] State energy management: China will produce 6.5 billion cubic meters of shale gas in 2015 [???:2015??????????65????]. The Renmin Ribao website energy page, March 16, 2012. Link http://energy.people.com.cn/GB/17409702.html
[19] Idem. For comparison, the U.S. produced 17 billion cubic meters in 2011.
[20] China turns to fracking to help meet growing energy demand, Public Radio International, August 17, 2012. Link http://www.pri.org/stories/world/asia/china-turns-to-fracking-to-help-meet-growing-energy-demand-11137.html
[21] China Gas Pricing and Regulation. China`s Challenges and IEA Experience, International Energy Agency 2012. P .27.
[22] China turns to fracking to help meet growing energy demand, Public Radio International, August 17, 2012. Link http://www.pri.org/stories/world/asia/china-turns-to-fracking-to-help-meet-growing-energy-demand-11137.html
[23] What To Expect From A Sinopec-Chesapeake Deal, Forbes, June 21, 2012, link http://www.forbes.com/sites/christopherhelman/2012/06/21/what-to-expect-from-a-sinopec-chesapeake-deal/
[26]Mark Fischetti, Ohio Earthquake Likely Caused by Fracking Wastewater], Scientific American, January 4, 2012. Link http://www.scientificamerican.com/article.cfm?id=ohio-earthquake-likely-caused-by-fracking
[27] Chesapeake Energy`s (NYSE: CHK) 100% Green Fracking Fluids], October 2, 2012, Link http://www.energyandcapital.com/articles/green-fracking/2640
[28] Fischetti, Mark. Fracking would emit large quantities of greenhouse gas, Scientific American, January 20, 2012 http://www.scientificamerican.com/article.cfm?id=fracking-would-emit-methane
[29] Idem
[30] http://rus.ruvr.ru/2012_09_20/Slancevaja-revoljucija-otkladivaetsja/ A.Mamichev. Shale Revolution postponed, Voice of Russia, September 9, 2012.
[31] David Hughes, Report: Will Natural Gas Fuel America in the 21st Century? Post-carbon Institute, May 29, 2011, Link: http://www.postcarbon.org/report/331901-will-natural-gas-fuel-america-in
[32] Link
[33] The Future of Natural Gas [Electronic Source] // M.I.T., June 10, 2011. - Link: http://mitei.mit.edu/system/files/NaturalGas_Report.pdf
[34] Howarth R. Methane and the greenhouse-gas footprint of natural gas from shale formations [Electronic Source] //Robert W. Howarth, Renee Santoro, Anthony Ingraffea, Climatic Change. April 2011. - Link http://www.springerlink.com/content/e384226wr4160653/fulltext.pdf
[35] New York State Assembly includes Fracking Health Study in Budget Proposal [Electronic Source]/ The Hufington Post, March 13, 2012. - Link: http://www.huffingtonpost.com/2012/03/13/new-york-state-assembly-fracking-study_n_1341610.html
[37]Gleb Ivashentsov: "Involvement in Asia-Pacific Economic Processes is the Necessity and Duty of Russia", September 3, 2012, link http://www.apec-center.ru/news/1030/show/
