China shale boom still a distant dream

An abundant source of domestic energy is obviously appealing to policymakers in Beijing, but China is still years away from exploiting the opportunity.
PetroChina paid Encana $2.1 billion in December for a 49.9% interest in an undeveloped shale asset in Alberta, Canada.
PetroChina paid Encana $2.1 billion in December for a 49.9% interest in an undeveloped shale asset in Alberta, Canada.

The US natural gas boom is a game changer according to many energy analysts. But it is unlikely that other countries, especially China, will be able to repeat the American experience despite grand ambitions and billions of dollars of investment.

Hydraulic fracturing has allowed US energy companies to extract abundant new supplies from shale deposits thousands of metres below the surface, lowering the domestic cost of energy and reducing America’s reliance on foreign oil.

According to consultancy McKinsey, this windfall will add as much as $690 billion a year to the US economy and could create 1.7 million new jobs by 2020.

“The development of shale oil and gas is probably the biggest structural change in the oil market for at least 40 years - since the development of North Sea oil,” said Eugen Weinberg, head of commodities at Commerzbank. “It’s a game changer in the longer term.”

China would like a piece of this action, and its national oil and gas companies have been investing in North American shale fields to gain access to the necessary expertise and to help them assess the value of their own domestic fields.

In the biggest deal to date, PetroChina paid Encana $2.1 billion in December for a 49.9% interest in an undeveloped shale asset in Alberta, Canada. Barclays advised it on the deal, which is its second significant shale investment after a $1.3 billion Citi-led acquisition of a 20% stake in Groundbirch, a Canadian shale asset owned by Royal Dutch Shell.

The reason for such enthusiasm is clear: natural gas holds the promise of cheap and abundant domestic energy, and is the cleanest of the fossil fuels (with none of the associated concerns that have led the Japanese and the Germans to turn their backs on nuclear).

However, America’s shale boom will be hard to replicate. Many of the best US shale assets are in the middle of nowhere, mineral rights are easy to secure and there are plenty of experienced workers.

None of this is true of China, and that will inevitably slow down the pace at which it can exploit the gas in Sichuan. Shale will eventually become an important component of China’s energy mix, according to Wood Mackenzie, a research firm that specialises in the resources industry, but not before 2020 at the earliest.

 

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