China’s shale hopes might damage already fragile LNG markets

Liquefaction plant in Sichuan, China
Source: press release

It is clear to anybody who has followed the developments in the international shale industry in recent years that China is very serious about developing its shale reserves. And while that may be very good news for the planet – China’s reliance on coal for power generation makes it the biggest sinner when it comes to climate change goals – it’s not such good news for the energy industry, already suffering from a glut of cheap natural gas.

As reported by OilPrice, the spot prices for liquefied natural gas (LNG) have plunged in recent years, falling by more than 75 percent from the 2014 highs. Too much supply has run headlong into a market that has seen demand slow significantly.

Yet with the world’s largest technically recoverable shale gas reserves (estimated by EIA at 1,115 trillion cubic feet) China’s dash for gas could bring disastrous results to the already struggling LNG markets.

China might have missed last year’s government-imposed production target of 6.5 bcm, but hardly a month goes by without an announcement of a new shale discovery in the energy-starved country. Only three weeks ago China Geological Survey (CGS) announced the discovery of a yet another huge shale gas field in its Guizhou Province, which is believed to hold as much as 13.54 trillion cubic meters of shale resources.

Also, despite many hurdles, the industry has managed to achieve significant progress in the last few years, with the country’s shale gas output reaching 4.47 bcm in 2015 according to the Ministry of Land and Resources.

China’s commitment to shale has recently been reiterated when the country’s state-owned giant, China Petroleum & Chemical Corporation – better known as Sinopec – pledged to double annual gas output to 40 billion cubic meters by 2020.

Clearly there are challenges; the geology proved to be difficult and there is an added problem of water shortages and the lack of infrastructure to support production. Also, Chinese explorers lack expertise to develop the often tricky resources. However, there certainly is no shortage of good will and the Chinese are open to foreign investment.

In April this year energy giant BP has entered into its first production sharing contract (PSC) with China National Petroleum Corporation (CNPC) for shale gas exploration, development and production in the Neijiang-Dazu block in the Sichuan Basin. The BP/CNPC contract is for exploration of shale in an area of approx. 1,500 sq km. CNPC will be the operator for this project. Other elements of the framework include possible future fuel retailing ventures in China, exploration of oil, global LNG and carbon emissions trading opportunities, as well as sharing of knowledge around low carbon energy and management practices.

Meanwhile, China’s thrid-biggest refiner Sinopec, which owns China’s highest-producing shale field – the Fulling field in south-west China’s Chongqing municipality – has managed to produce 2.7 bcm of gas from the area during the first six months of 2016. This is twice the level recorded during the same period in 2015.

“Chongqing has become the main place for commercial shale gas development, and Fuling has become the largest shale gas field in the world outside North America,” Sinopec said.

According to Weng Jieming, vice mayor of Chongqing, “Our country has entered a new journey of energy revolution, meaning that our country’s natural gas supply structure will change from now on.” He added that the shale revolution has “great significance” on alleviating China’s constraints in natural gas supply, reducing external dependence, upgrading people’s livelihoods and reducing air pollution.

Chinese shale success might spell doom for some of the high-cost investments that are already in motion, such as ExxonMobil’s recent $2.5 billion offering for InterOil, a company that has gas assets in Papua New Guinea and will allow the oil major to expand LNG exports from that country. Similarly, Royal Dutch Shell’s $54 billion purchase of BG Group might fall short of its expected return if LNG markets remain depressed for a long time. Since a lot of the LNG cargo is currently set to sail to Asia, China’s gas independence would considerably shrink this market.

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