China: Study Says Shale Gas Will Not Satisfy Demand

August 2012, Vol. 239 No. 8

Kuala Lumpur, MALAYSIA—One of the biggest topics of conversation at the World Gas Conference was the potential for shale gas resources in China. While major producers such as Royal Dutch Shell are optimistic and others are at best uncertain, a new study released here by Wood Mackenzie indicates that China will indeed become a major importer of natural gas by 2030.

The International Energy Agency reported at the conference that global gas demand will expand by annual average of 2.7%, reaching 3.9 Tcm 2017 compared with 3.3 Tcm in 2011. China will comprise most of that increase as it becomes the third-largest gas importer, trailing Europe and Asia/Oceania. The IEA said China’s demand for natural gas will grow at an average of 13% annually as it becomes the fastest growing market with consumption doubling from 130 Bcm in 2011 to 273 Bcm in 2017.

At the conference, Edinburgh-based Wood Mackenzie launched its new China Gas & Power Service. Gavin Thompson, head of Asia Pacific Gas Research, said that although the industry has been focused on China’s shale gas developments, this is a long-term story and while substantial, will not satisfy China’s demand.

Instead, the focus will also need to be on China’s import options to meet rapidly increasing demand which is expected to quadruple by 2030. This presents opportunities for pipeline suppliers in Central Asia and Russia in addition to LNG suppliers, including, potentially from North America. Meanwhile, coal-to-gas (CTG) will play the dominant role in near-term domestic supply.

“We remain positive that China’s domestic shale gas will be a major boost to supply growth, producing approximately 150 Bcm per annum by 2030, largely accounted for by the Sichuan and Tarim basin production. However, shale gas growth will only accelerate after 2020, staying under 30 Bcm before then,” Thompson said. “Meanwhile, China’s gas demand will increase from just over 150 Bcm to more than 600 Bcm from now to 2030. China will make up almost 30% of global incremental gas demand growth within the timeframe.”

“Indeed, while the industry is increasingly focused on domestic shale, we believe that both goal-to-gas projects and coalbed methane (CBM) will each deliver more output into the Chinese gas market than shale right up to 2024. By 2020, we see CTG and CBM producing 27 Bcm and 17 Bcm respectively against only approximately 11 Bcm of shale production. These sectors are therefore far more significant through the medium-term but are not receiving the appropriate level of attention outside of China.”

Although Beijing has ambitious shale gas targets for 2020, Wood Mackenzie believes production will be delayed due to a range of challenges. The key challenges are: a need for deeper geological understanding of China’s shale potential and know-how to exploit this; uncertainty of the NOC- dominated landscape for efficient allocation of capital where a dramatic increase in capital spend is required; lack of supply chain services and infrastructure; complicated issues around land access; and environmental plus regulation challenges.

The study says China will require new imported LNG and pipeline supply in addition to growth in domestic conventional and unconventional gas supply.

“Even with unconventional gas growth, China will still require over 130 Bcm of uncontracted imports by 2030. While Chinese buyers remain sensitive to price, strong demand; seasonality; limited shale supply into coastal markets before 2025; and the government’s push toward price reform will drive new contracting over the next few years,” Thompson told his audience.

“This creates opportunities for suppliers looking for a Pacific Market such as Turkmenistan, Russia and LNG. However, each of these supply options has specific challenges that stand in their way of securing market.”

Turkmenistan is a critical option for China, with deliveries expected to increase from 25-40 Bcm between 2012-2015. Completion of West-to-East 3 will also take total pipeline capacity for Central Asian gas to 60 Bcm from 2015. Still, South Iolotan development (regarded among the top five gas fields in the world) presents major challenges and Turkmengaz’s ability to integrate and commission the field and facilities will concern China.

Russia is another vital supply option and the importance of a deal is rising for both China and Russia, despite unsuccessful negotiations so far. Russia’s supply growth into Europe is being stymied by slow demand growth, encouraging Gazprom to seek new markets as competition into Europe increases, and the pricing outlook remains weaker than those in many key Pacific markets.

In the mid-term, China’s LNG position is stronger than regional buyers like Japan and India, with LNG demand reaching only 18 Bcm by 2017. However, long-term LNG demand will accelerate, requiring an additional 33 Bcm by 2020 and 50 Bcm by 2030. As a result, Chinese buyers are likely to show interest in multiple LNG projects.

“Significant remaining challenges in China’s shale developments imply that substantial supply will likely materialize later than targeted. Increasing gas demand calls for China to prioritize additional supply options. And even when substantial shale gas is developed, total unconventional gas contribution will still leave China with uncontracted requirements. Suppliers in Turkmenistan and Russia in addition to LNG suppliers are well-placed to capitalize on this,” Thompson concluded.

China To Increase Gas Imports, Production To Meet Ballooning Demand
Meanwhile, a related report released July 5 by London-based GlobalData backs up the Wood Mackenzie study. GlobalData says that with China’s natural gas consumption set to almost treble over the next eight years, the Asian giant will draw from all available sources to keep up with demand.

According to the company’s latest research, China’s natural gas consumption was 131.7 Bcm in 2011, already a steep rise from the 2000 figure of 24.5 Bcm. However, consumption levels are predicted to soar even higher to reach 375 Bcm by 2020, thanks to the country’s desire to increase the share of natural gas in its energy mix.
China has substantial natural gas reserves of its own, but demand has already outstripped production, making imports essential. In 2011, China consumed approximately 131.7 Bcm of natural gas, though it only produced 100.9 Bcm – a disparity that will only grow in the future.

Accordingly, major Chinese National Oil Companies (NOCs) such as China Petrochemical Corporation and its subsidiary China Petroleum & Chemical Corporation (Sinopec), China National Petroleum Corporation (CNPC) and its subsidiary PetroChina Company Limited (PetroChina), and China National Offshore Oil Corporation (CNOOC) are actively involved in the partial or full acquisition of overseas assets in an attempt to guarantee long-term national gas security.

The importation of LNG is also set to be an important strategy in fulfilling China’s natural gas needs. In 1998 it approved its first LNG project in the Guangdong province to meet the energy shortages in the country’s southeastern coastal area.

By the end of 2011, five LNG terminals were operating in China with a total regasification capacity of approximately 1 Tcf. This will climb to 2.8 Tcf by the end of 2016 at an Annual Average Growth Rate (AAGR) of 19.7%, due to the introduction of a further 11 terminals.

In March, China announced a new shale gas development plan, one of the stated aims of which is to produce 6.5 Bcm of natural gas by 2015. The government also disclosed onshore shale gas reserves of 134.4 Tcm and exploitable shale gas reserves of 25.1 Tcm (excluding the Qingzang Plateau area in the Tibet region) – a declaration that confirms China as one of the largest holders of shale gas reserves in the world.
Previously in December 2011, China stated the aim to produce 30 Bcm of coalbed Methane (CBM) by 2015. 16 Bcm of this is expected to come from ground-based projects and the remaining 14 Bcm from coal mine projects.