With World's Largest Reserves, China Starts to Forge Ahead with Development

The air was charged with excitement as hundreds of people crowded into a central Beijing hotel conference room on the morning of Oct. 25, with lucrative Chinese shale gas mining rights at stake.

Industries from gas and electricity to real estate, including China's three largest oil companies, were represented as personnel from 83 companies gathered to tender bids at this second offering of mining rights.

Up for grabs were the rights to 20 domestic mining lots, in places such as the city of Chongqing and Hubei province, totaling 20,000 square kilometers.

Through joint ventures, the bidding this time was opened up to foreign capital as well. According to the Chinese Securities Journal, bids in excess of 1.7 billion yuan (21.7 billion yen, or $273 million) were received. When a bid was displayed on an electronic signboard, staff from rival companies began snapping pictures with their iPhones and iPads, reporting the information back to their companies. Bid results are expected to be released in mid-November.

In terms of estimated reserves, China has more shale gas than the United States. To date, test wells have found gas in 24 locations. In March, a plan given to a person involved in the industry revealed a production goal of between 60 billion and 100 billion cubic meters of gas by 2020. Those figures are equivalent to between 40 and 70 percent of the United States' 2010 production volume.

However, full-fledged commercial production has yet to begin. In June, Liu Tienan, head of the National Energy Administration, gave instructions to "start commercialization as soon as possible to raise the energy self-sufficient rate," adding, "Energy security is important."

Natural gas consumption in China has quintupled over the past 10 years and last year exceeded Japan's annual consumption by about 20 percent. The development of natural resources to support growth is given a high priority in China. The percentage of crude oil imports there has reached 57 percent, and natural gas is expected to reach about 40 percent by 2020. For China, shale gas is an undeveloped treasure waiting to be tapped.

In July, the China National Offshore Oil Corp. (CNOOC) announced that it was buying Canada's Nexen Inc., a major player in the energy field, for $15.1 billion (1.2 trillion yen). Although Nexen has global oil and gas interests, the intention of CNOOC's purchase is said to be the acquisition of Nexen's shale gas development technology.

The other two of the big three Chinese oil companies are also buying shale gas interests in the United States and Canada, seeking to acquire technology related to development.

The CNOOC purchase is raising concerns in the United States, where Nexen has gas interests, and a review is currently under way. On the other hand, three years ago, China and the United States began developing a working relationship in the area of shale gas.

When U.S. President Barack Obama first visited China in November 2009, the two countries agreed to conduct joint research on shale gas. China's goal was to acquire technology from the United States while Washington was angling to have American companies profit from involvement in the Chinese market. Since then, the United States has been widely cooperating in areas such as exploration technology, environmental measures and the preparation of laws.

China, using a strategy it started more than 30 years ago of "selling a piece of the market to gain technology," is working to shift its "energy revolution" into high gear to support growth in the new century.

However, indications of substantial uncertainty also persist. Taking the viewpoint of industry participants, the state-operated Xinhua News Agency reported, "The situation with regard to reserves is not clear, core technologies are immature, and commercial prospects have not been made evident."

Reserves in China are estimated using less data than what is used to estimate deposits in the United States, and the terrain is complicated, making digging difficult. Water is essential for shale gas development, however, the mining areas tend to be inland districts suffering from water shortages.

"Prominent mining districts Sichuan and Chongqing are in seismically active areas, there are concerns as to what kind of impact drilling would have," said a person belonging to a Beijing-based environmental NGO.

"Uncertainty is too high, not much can be expected in the short term," said Jianjun Tu, a researcher at the U.S. Carnegie Endowment for International Peace. "(However), if China had a breakthrough like that in the U.S., it would greatly affect international oil and gas prices.

"China would also move to a position of dominance in its diplomatic relations with neighboring Russia."

Even if there is no rapid development, some within the industry are saying things like, "Just the existence (of the gas) underground becomes a bargaining chip." "If increased production in the United States leads to Middle Eastern gas going to Europe, Russia cannot help but lean toward selling (gas) to China."

MAJOR GAS POWER RUSSIA CLOSELY WATCHING U.S. MOVES

Russia is remaking its grand design for gas exports with an eye toward 2030.

On Oct. 23, Russian President Vladimir Putin called executives from the Ministry of Energy and from Gazprom, the state-controlled natural gas company, Russia's largest, to his official residence in the outskirts of Moscow and told them, "With their active production of shale gas, the U.S. and Canada have become new players (in the market)." With this recognition as a backdrop, he stated, "Politicians, specialists and those in the industry began to talk about a bona fide shale gas revolution."

According to the Russian business daily Vedomosti, even in 2010, when U.S. shale gas production swung into high gear, Gazprom CEO Ａｌｅｘｅｙ Miller had said, "Shale gas does not seriously impact the European market." Holding the view that if there was no movement in Europe, Russia's primary export market, Russia would not be affected.

However, in 2011, the demand for natural gas in Europe dropped 9.9 percent. In addition to the economic crisis, the reason behind the decline was attributed to the replacement of gas with cheap coal from the United States.

Alarmed, Putin admonished Gazprom and encouraged action. Specifically, he directed the company to supply liquid natural gas to the rapidly growing Asian Pacific region. In fact, after the Sakhalin-2 oil and gas development project, progress has been made on another plan in the Russian Far East, this time to build an LNG production plant in Vladivostok in collaboration with Japanese companies.

With regard to Chinese shale gas, meanwhile, the majority of Russian experts believe that Chinese production will not be possible until 2020 due to technical challenges.

Vladimir Likhachev, a deputy director at the Energy Research Institute of the Russian Academy of Sciences, pointed out that China, as before, has maintained a strong interest in Russia's move to build a market for its gas in the east Asia.

"What will happen in Central Asia as the U.S. starts to withdraw from Afghanistan?" Likhachev said. "Due to geopolitical factors, will supplies from Central Asia and Myanmar be reliable? For China, gas from Russia transported via a pipeline is the most reliable."

Mikhail Krutikhin, a senior analyst for RusEnergy Consultants, estimates that by 2016, the United States and Canada will be supplying about 30 billion cubic meters of shale gas to the international market. However, this amount pales in comparison to Russia's production of approximately 530 billion cubic meters. Krutikhin does not believe it is enough to seriously reduce gas prices and doesn't see shale gas as a major threat.

Still, with regard to the future of Russia as a great gas power, Krutikhin's view is pessimistic.

Why? Because what the LNG Russia will supply to the Asia Pacific region is extremely expensive. Compared to Australia and Qatar, which, like Russia, are big gas exporters, Russia's competitiveness is weak. Going forward, natural gas prices in Asia will drop and are expected to hit about $7.50 per thermal unit (1 million BTUs) between 2020 and 2030. In comparison, natural gas from Sakhalin-2 is $11.20.

Exports of gas to China will also be difficult. By 2025, in addition to increasing its own production of shale gas, China will be receiving gas from Central Asia and Myanmar and LNG from Australia. There will be no market for Russia's gas in China. In the not-so-distant future, it is also predicted that a global energy revolution will take place with the mining of methane hydrates and other energy sources.

Committed to surviving the global gas competition, Russia is under pressure to come up with effective strategies for justifying the existence of its own gas in the market.