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China’s optimistic shale gas plans questioned

12 July 2012 – China’s recently announced development plans for shale gas production may be overly optimistic, considering the geological complexities of China’s shale formations, according to natural resources expert GlobalData. It suggests that the geology of China’s shale gas reserves, as well as the country’s water shortages, insufficient pipeline infrastructure, government control over natural gas prices, and environmental issues will all challenge China’s ambitions, despite the country’s extensive plans to support and encourage industry growth.

China’s five-year shale gas development plan for 2011 to 2015, released on the 16th of March 2012, boasts the target of 6.5 billion cubic meters (bcm) of annual shale gas production by 2015. The plan states that a two-year appraisal of China’s shale gas reserves, an increase in China’s expertise on shale gas technologies, and the development of a regulatory framework will also be accomplished. However, the industry remains cynical of the ambitious production targets.

The Chinese ministry of land and resources stated on the 1st of March 2012 that China has onshore shale gas reserves of 134.4 trillion cubic meters (tcm), and exploitable shale gas reserves of 25.1 tcm. The Chinese government promises to support the research and development (R&D) of shale gas technology, and will also accelerate the process permitting investors to develop shale gas reserves.

A contract management system will also be put into place to control and monitor industry activity. China will consider the introduction of subsidies for shale gas projects, which will assist companies with obtaining a waiver or reduction of their license fees, priority for land use permits, and exemption of custom duties for the import of shale gas equipment and related technologies which is unavailable in China. Essentially, the government aims to provide an adequate policy environment for huge shale gas development.

The construction of natural gas pipelines will be encouraged at shale gas reserves that are close to existing gas pipeline networks, and the construction of small-scale liquefied natural gas (LNG) or compressed natural gas (CNG) facilities will be encouraged at shale gas reserves remote from existing pipelines. However, the development of the domestic pipeline network will take time and money, and this is expected to slow the pace of shale gas development.

China aims to achieve a commercial level of shale gas production which has so far only been achieved in North America. However, Chinese shale gas companies cannot currently use the high performing drilling technologies used to extract shale gas in the US, as further research is needed to adapt the US’s drilling methods to China’s very different geology.

Shale gas development also requires Chinese authorities to deal with the environmental issues associated with this industry. Water shortages are a major issue in China, yet hydraulic fracturing technology requires vast quantities of water, and is claimed to contaminate waterways with corrosive and toxic pollutant hydrogen sulphide, which Chinese shale gas contains in abundance. Sophisticated drilling and gas purifying technologies, and strict emission standards would be needed to save China from the corrosion of drilling equipment and air pollution.

Lastly, the Chinese government is expected to encourage international exchanges and co-operation, yet state control over natural gas prices will keep natural gas prices artificially low, not reflecting the realities of the natural gas market. Shale gas development companies will therefore have little incentive for development, as profitability will be minimal. With the development of shale gas requiring huge capital investment, the industry remains uninspired as government policies, especially on pricing, threaten to remove any financial attraction.