The Road to Chinese Shale Gas Goes Through the U.S.

In last week's Energy Trends Insider (ETI) I analyzed why The Road to Chinese Shale Gas Goes Through the U.S. In addition to my article, Andrew Holland explained how the DOE Report on Economics of Natural Gas Exports Will Lead to LNG Export Permits and Robert Rapier wrote about profiting from the peculiarities of gas price fluctuations in ‘Rockets and Feathers' — Investing in Refiners. As we have done previously, we would like to share a story from ETI with regular readers of this column. Interested readers can find more information on the newsletter and subscribe for free at Energy Trends Insider.

The Road to Chinese Shale Gas Goes Through the U.S.

China is reported to have massive unconventional natural gas resources. Technically recoverable gas reserves are forecast to be 36 trillion cubic meters, making it the world's largest reserve pool according to EIA, and nearly 50% larger than the U.S.'s reserves. In the country's most recent 5-year plan it laid out a goal of 6.5 billion cubic meters of production by 2015, a steep increase from the current production level of zero.

A combination of three factors has created an explosion of interest in China shale gas and the associated fracking technologies: (1) natural gas prices in China have been trading several times higher than gas in North America (and even at a significant premium over the EU); (2) there is a forecast for tremendous growth in the demand for energy in China over the coming decades; and (3) the current plans for power generation call for the building of vast amounts of greenhouse gas producing new coal-fired generation, which creates a number of concerns both inside and outside of China.

What stands between China and a shale gas revolution like the one underway in the U.S.? There are two significant hurdles.

First, much of the recoverable gas will be technically very challenging to extract – it is relatively deep, much of the gas exists at the limits of depths for what has successfully been fracked in the U.S., much of the reserve geography is mountainous and difficult to access, and the vast reserves in the arid north of China will require some way to frack waterlessly or utilize a source of water that has yet to be identified.

Second, almost all fracking technology and experience is owned by U.S. companies, and certainly the potential to pursue these more challenging gas reserves will require cutting edge technology and processes. All of which guarantees that the path to Chinese shale gas must successfully leverage the technology and expertise of the U.S. gas services and technology industry.

Investment by Chinese companies into the U.S. shale market is already underway. The two largest oil companies in China have made significant investments. CNOOC has partnered with Chesapeake Energy on production ventures and Sinopec joined with Devon Energy in a similar agreement. Both deals were minority interests in actual gas production, and were generally viewed as investments to try to learn the fracking process by being part of the exploration and production team. How successful these early ventures will be for exporting fracking know-how and technology remains to be seen. Regardless of how these early investments play out, the interest by other companies – energy companies, manufacturing companies, technology companies and others – to be part of the Chinese shale revolution is ready and significant.

As this shopping binge starts in earnest, and there are indications of that happening right now, the price of fracking technologies, from valves and pipes to chemicals and advanced analytics, along with actual extraction expertise is going to rise here in the U.S. as Chinese firms bid to acquire the necessary technology and expertise to accelerate its own shale gas revolution. How significant the technology and expertise price increases will be remains to be seen, but the Chinese appetite, and the likely pace of acquisition over the next few years will likely have a material impact on not just the service and technology, but on the cost of production here in the U.S.