China to Benefit from Shale Gas Boom

With more than half of China's oil consumption currently met by imports, the nation is giving greater consideration to domestic non-conventional alternatives. China is targeting its significant shale gas reserves, aiming to produce 15-30 billion cubic meters a year by 2020. In a move that signals a shift in policy, China has also allowed foreign participation in its upcoming shale blocks auction.

With the sustained recovery of global oil prices, non-OPEC countries are looking at alternative and cost-effective energy sources. After its recent success in the US market, shale gas is emerging as an increasingly viable means of sourcing natural gas. The vast shale gas reserves that exist in countries such as China and India are only helping to fuel this trend. The estimated shale gas potential in China stands at 33,000 billion cubic meters (bcm), which is about 10 times higher than its proven natural gas reserves.

Although plans are currently only in the preliminary stages, China aims to reach an annual production capacity of 15-30bcm of shale gas by 2020. It has also set a production target of 28.3bcm per year from unconventional sources, which is equivalent to 30% of the nation's 2010 natural gas consumption. With Chinese oil consumption at 9.3 million barrels per day (b/d) in 2010 - a figure expected to rise to 9.7 million b/d in 2011 - and gas demand expected to soar to 180-200bcm by 2020, alternative resources can play a pivotal role in meeting rising energy demands. In addition, China - which has so far only allowed limited foreign participation in its oil and gas sector - is now prepared to allow strategic partnerships with international oil companies (IOCs) as a means of developing its unconventional gas resources.

China's recent decision to allow foreign companies to form partnerships with Chinese national oil companies (NOCs) in order to bid on six shale plays in the upcoming auctions suggests that the nation understands its energy situation well, and is prepared to change its policies accordingly. Companies such as BP, Chevron, and Statoil have shown a keen interest in China's alternative resources, and have already initiated investment proposals. Shell, for example, has laid out plans to invest $1bn annually over the next seven years in China's unconventional sector, which includes an alliance with PetroChina to develop the Fushun shale gas block in Sichuan province. Datamonitor believes that if China intends to replicate the shale gas success seen in the US, it has to proactively implement policies and frameworks to make this sector more attractive to foreign investors.

Technology and capital investment are both critical to the successful exploitation of alternative resources. Although China has capital to invest in the sector, its NOCs do not yet have the advanced technologies needed to best harness the nation's shale gas potential. Therefore, a collaborative approach that includes IOCs will be necessary to help China reach its gas production targets. However, the long-term investment plans will only flourish if China ensures balanced regulatory terms that allow the development of the country's unconventional resources, and do not hamper the commercial plans of the IOCs and other foreign companies.

Source: Datamonitor