Pipe Dreams
China Desperate to Catch Up to US Shale

This is a buyer’s market for hydrocarbons, but that isn’t stopping China from aggressively pursuing its shale gas dreams. Beijing signed a landmark overland natural gas deal with Moscow two years ago, and China is also enjoying an LNG market that has seen prices plunge as Australia, Qatar, and now the United States are all contributing to a global glut. Not satisfied with this rosy gas import picture, China is busy chasing down the shale bandwagon. The WSJ reports:

[Sinopec’s] shale push is helped along by government subsidies and political support—meaning there is less environmental debate around shale-gas production than in the U.S. […]

The company says gas production rose 10% in the first half from a year earlier. It will need significantly higher output the rest of the year to hit a growth target of about 18%.

Sinopec acknowledges costs and other challenges in Fuling, and says it is working to overcome them. To help curry favor, it gave a 1% stake in its Fuling unit to a local government investment firm. That gives local officials an incentive to help Sinopec succeed.

China expects its demand for natural gas will continue to grow in the coming years, but that’s not the only reason it wants to develop its shale gas reserves (which, by the way, are the largest in the world). China doesn’t want to be dependent on foreign suppliers for its energy needs, and especially doesn’t want to have to rely on LNG, which travels by ship through seas policed by the U.S. Navy.

But while American companies have made fracking look easy in recent years, in practice it’s anything but—and in China it’s an even more difficult endeavor. China lacks the requisite pipeline infrastructure, and its geology is more “crunched” than America’s relatively even-layered rock, which makes drilling horizontal wells a lot more difficult. As if that wasn’t complicated enough, China also faces some major water scarcity issues, which is an obvious hurdle for any sort of serious expansion of water-intensive fracking operations.

The market isn’t primed for it, the geology isn’t favorable, the pipelines are absent, and the water isn’t there, but for energy security and geopolitical reasons, China remains as committed as ever to its fledgling shale industry.

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