Among China’s long list of feats is one that reads: host to the largest shale gas deposits in the world (see Fig. 1). And while at first glance the characteristic appears the perfect fit for the world’s number one consumer of energy, the process of tapping what precious resources sit beneath the surface is riddled with potentially damaging repercussions for those above ground.
Across the pond, shale gas development has fuelled a resurgent US energy market and sparked talk of self-sufficiency in the not-too-distant future – with the International Energy Agency (IEA) and BP agreed that energy independence is on the cards for 2035. Far more than an isolated finding or two, America’s vast shale gas reserves have allowed the country to break free of its dependence on fuel imports and made way for hundreds of thousands of additional jobs. Starting at 0.6 trillion cubic feet in 2004, shale gas production is forecast to tip the 17 trillion mark by 2040.
The transformative effect of the so-called ‘shale revolution’, therefore, is something Chinese authorities have been eyeing with interest, given that the country’s estimated recoverable reserves are 70 percent greater even than America’s. However, looking at the country’s headline figures in isolation is to ignore the many obstacles that stand in the way of extraction, namely complicated geology, inadequate technology, skills shortages and ground water contamination. And as China’s natural gas consumption continues to climb, 90 percent between now and 2019 according to the IEA, the country must weigh up the benefits of production against the risks associated with extraction.
70%
of China’s rivers and lakes are unfit for human consumption
The importance of the dilemma was again made clear in August when Wu Xinxiong, Director of the country’s National Energy Administration, cut 2020 production capacity estimates in half. And although in 2012 the National Development and Reform Commission claimed production capacity would reach 60-80 billion cubic metres before 2020, Xinxiong’s revised figures pointed to the lesser sum of 30 billion cubic metres. What’s even more disconcerting is that the new estimates are equivalent to little over one percent of China’s total consumption, which begs the question of what sacrifices must necessarily be made for the country to meet demand.
“China’s energy security and battle with air pollution urgently require China to constantly develop shale gas projects,” says Xiaoliang Yang, Research Analyst at World Resources Institute China. “As China gains more and more experience with strong government support, it is possible that China would have its own shale gas revolution, eventually helping China decrease its reliance on coal. Before that, China needs to sort out the technical, political, and market challenges, which leaves a long way to go.”
Coal to gas
With an average annual GDP growth rate of 10 percent in the period through 2000 to 2011, China’s sky-high economic and social development came accompanied with an insatiable appetite for fossil fuels. Specifically, the country’s fixation on coal has shrouded its largest cities in smog and last year resulted in greater greenhouse gas emissions than the US and all 28 EU nations combined. Accounting for close to 65 percent of the nation’s total energy mix, China’s coal obsession has received severe criticism from inhabitants and environmentalists alike, and with good reason. Health Effect Institute figures show that the pollution emitted by its cars combined with its 3,000 plus coal-fired plants was responsible for 1.2 million premature deaths in 2010 alone.
“The country’s consumption is expected to increase to 311 billion cubic meters by 2020. Of which only 200 billion cubic meters is expected to be met through conventional domestic production. The remainder of the demand has to be met through unconventional sources,” says Anshuman Bahuguna, Senior Research Analyst at Grand View Research.
A departure from coal is critical for a country keen to escape the consequences for its inhabitants, and the energy sector has found itself forced to reposition its strategy and focus instead on low-carbon alternatives to stave off what hazards a reliance on coal might bring.
Crucially, major industry names have taken pains to exploit the country’s vast shale gas reserves, and have already mapped out 54 shale gas blocks and drilled 400 wells, 130 of which are horizontal. State-owned China National Petroleum Corporation (CNPC), for example, has etched out plans to drill over 110 wells before the mid-point of 2015, building on the nine wells it runs currently.
Elsewhere, a transcript posted on the Ministry of Land and Resources website outlines what figures the market’s constituents hope to post in the years ahead – 1.5 billion cubic metres in 2014, 6.5 billion cubic metres in 2015 and 15 billion cubic metres in 2017. And while the country already accounts for 13 percent of world shale gas growth, according to the BP Statistical Review of World Energy 2014, the resource is not without its fair share of challenges.
Greater implications
Critical to China’s energy market inadequacies is how viable a solution shale gas will prove, coupled with the financial costs and the repercussions this could bring for the country’s dwindling fresh water supply. And though fracking is far from subject to the same scrutiny it has been in Europe, the fact remains that the implications of drilling are likely far larger on the Asian continent than they are elsewhere.
Whereas in the US, many of the better known shale gas deposits lie close to the surface, in China the ‘recoverable’ reserves are either buried far below ground or located in densely populated areas, both of which come with a premium price tag. Research conducted by Bloomberg New Energy Finance in May found that China’s shale gas production costs were double what they were in the US, and, despite superior reserves, the government’s 2015 target is short of what the US was producing in the late 1990s.
“Over the course of five years, China needs to train its personnel and equip them with the skills required for shale gas production. The government has to ease regulatory barriers and frame a light handed regulatory environment. Through technology sharing with US, China can offset the lack of technology,” says Bahuguna.
If China is to compete on costs with the US, the government must introduce both increased tariffs and subsidies; and for most residing in the region, not doing so would mean operating at a loss. Without additional stimulus, China’s fledgling natural gas industry will be hard pressed to replicate the success of its American counterpart. “There is no doubt that China’s central Government will continue to support shale gas development,” says Yang.
Water pollution
Ahead of China’s concerns regarding feasibility and competitiveness is the issue of water scarcity, which could rear its ugly head like never before – should leading industry names decide to increase shale gas production at quite the same rate they have been doing. And while economies of scale and infrastructural improvements have made the practice of exploiting shale gas more financially viable, the repercussions for the country’s already-short water supply could be dire.
The issue of water scarcity has already halted a number of plans to exploit shale deposits, namely at the Tarim Basin, a site that, while large, is without sufficient water supply to facilitate the fracking process. Home to 20 percent of the world’s population, the country is also home to only six percent of available fresh water reserves, and is losing what reserves it has fast, due to economic development, out-dated agricultural practices and climate change.
Ahead of China’s concerns regarding feasibility and competitiveness is the issue of water scarcity, which could rear its ugly head like never before
According to government findings, 70 percent of China’s rivers and lakes are unfit for human consumption, and last year, reports circulated about 28,000 of China’s 50,000 rivers having disappeared over a 20-year period. The mismanagement of the country’s fresh water reserves in years passed has given rise to growing concerns of chronic shortages in the near future. And whereas the overwhelming majority of demand today stems from agriculture, industry will represent a greater share of the total in the years ahead, owing primarily to the adoption of water-intensive processes such as fracking.
Aside from the amount of water required to tap shale gas, critics have posed the question of whether the process itself contaminates groundwater and, if so, whether the rewards are equal to the repercussions. One study undertaken by a research collective at the University of Texas found traces of methanol and ethanol as well as metals such as selenium, strontium, strontium and arsenic in wells located alongside extraction sites, though the exact reasons for are unclear.
Far from excluded to China, a report authored by the World Resources Institute in September found that 38 percent of the world’s known shale resources are situated in areas that are either arid or under extreme water stress. What’s more, approximately 386 million people live in shale rich regions, where public demand for water is likely to come to blows with industry demand, though China’s woes are among the worst, with 61 percent of its shale plays facing water shortages or located in arid conditions.
Should China decide to increase its shale production, the technical demands of doing so should be seen as secondary to the plight of those living in water scarce regions. Without the guarantee that fracking will not put the country’s already-stretched fresh water reserves at risk, China will be given little option but to rely on imports and focus instead on the transportation and storage of natural gas.
