OREANDA-NEWS. November 14, 2014. China’s Ministry of Land and Resources (MLR) has dismissed the country’s recently downgraded shale gas output goal by suggesting China will pull ahead of others to join the United States as a leading producer of the unconventional fuel.

Australia and Argentina have been tipped by many to be the next big players in global shale, but an MLR official said China should not be discounted in the shale race.

China’s shale industry is entering a period of rapid development and could overtake Canada as the second-largest producer of shale gas in the world behind the US, said Pan Jiping, director of the MLR’s Strategic Research Centre of Oil and Gas Resources.

“I think we will probably surpass Canada earlier than 2020, maybe in 2018,” Pan told Interfax. Low gas prices in Canada and potential LNG exports to Asia will act as brakes to Canadian shale gas output growth, according to Pan.

Like China, Canada remains in the early stages of shale gas development. The Canadian National Energy Board has predicted its output will be around 50 billion cubic metres per year by 2035.

Pan forecast Chinese production of 40 bcmy by 2020 – larger than the National Energy Administration’s (NEA’s) target of 30 bcmy. The NEA’s original goal was revised down from 60-100 bcmy.

China will account for 15-20% of the 1.1 trillion cubic metres of shale gas produced globally in 2035, said Pan. That means China could be pumping 165-220 bcmy in two decades’ time, compared with 200 million cubic metres (MMcm) in 2013.

Government policy – and not geology or technology – will be central to China’s shale development. National energy structures and policies are key challenges for shale gas industries worldwide and China is no exception, according to Pan. Upstream and downstream market liberalisation, the adequacy of related laws and regulations, and the extent of support and stability will determine the progress and outcome of development to a large extent, he added.
That message was emphasised in a recent report from the Center on Global Energy Policy at Columbia University in the US. It said government policies will play a central role in determining the growth of the Chinese shale gas sector in the years ahead.

The report, titled Meeting China’s Shale Gas Goals, said the growth of China’s shale industry will be shaped by at least three broad factors the progress and details of economic reforms, the content of shale-specific policies, and the government’s commitment to innovation.

It recommended China accelerate market-based reforms, provide a clear roadmap for foreign companies, invest in innovation and enhance ministerial coordination.

Foreign capital needed

Opening up the shale gas industry to more participants is the most important policy tool, said Wang Jin, director of the Institute of International Energy under the National Development and Reform Commission. China needs foreign capital for shale to succeed; domestic investors are reluctant because of profitability concerns, Wang told Interfax.

Pan agreed convincing investors to provide funding was a challenge for the shale industry across the globe. He noted global shale investment to date stood between USD 800 billion and USD 1 trillion as of June this year, but less than USD 15 billion of that was spent outside North America. The US shale industry benefited from a large influx of foreign capital, with overseas investment exceeding USD 90 billion up to 2012 and poised to hit a total of USD 118 billion this year, said Pan.

Foreign companies can also provide expertise, technology and capital that could help develop China’s shale resources, but they face significant restrictions on their ability to participate in the Chinese market.

IOCs must partner with a domestic company to develop shale, but they could be allowed to develop it independently in the future, said Wang. He said the central government is drafting a reform plan for its energy structure that will affect both conventional and shale gas, and may release it in the second half of 2015.

Emerging Chinese oil and gas companies are keener to cooperate with foreign firms and are more likely to offer better terms in production sharing contracts, Li Liang, vice general manager of gas resource development at Huaneng International Power Development, told Interfax. These might include longer production periods, no relinquishment obligation and the right to participate in other hydrocarbons discovered in the contract area.