Pages

Ralph Winnie Jr. with the Mongolian President

Ralph Winnie Jr. with the Mongolian President

Blog Archive

Wednesday, November 20, 2013

Ralph Winnie, Jr.'s Article on Shale Gas in China Green Tech magazine


Over the past twenty years, China has 
experienced dramatic economic growth, 
transforming itself from a basically agrarian 
society into the world’s second largest 
economy behind only the United States. 
Since the initiation of economic and political 
reforms in 1978, China has produced an 
average annual growth rate of 10%. From 
1978 to 2008, China increased its GDP 83 
times (NBS, 2009) and lifted over two 
hundred million of its people out of poverty. 
This has continued to generate increased 
energy supply. Within China’s energy 
sector, production was stimulated by the 
clarification of mineral exploration rights, 
the development of transportation and 
roadway infrastructure projects, 
diversification of management structures 
and the liberalization of environmental and 
safety regulations. Rising living standards 
necessarily create more domestic 
consumption, including high-energy items 
such as air conditioners, refrigerators and 
televisions. Consequently, the growing use 
of automobiles by the Chinese consumer is 
creating energy security concerns as China 
must routinely import more than half of its 
oil from countries such as Iran, Russia and 
Venezuela. Therefore, it is not surprising 
that China is scrambling to secure its future 
sources of energy today. The Chinese are 
continuing to seek new sources of energy 
fuels throughout the world and have even 
considered going into outer space, 
considering the possibility of mining the 
moon for Helium 3 which is used in nuclear 
fusion research and potentially a second 
generation fusion fuel. 

Furthermore, as the sale of automobiles 
in China is expected to surpass those in the 
United States within the next five years, 
there is growing concern in China about 
energy security, power capacity shortages as 
well as air pollution which are generating an 
increased desire on the part of the Chinese 
Central Government to focus on alternative 
technologies, including clean coal 
technology, nuclear power and renewable 
sources of energy. In fact, China is 
expected to invest over 10 billion in support 
of renewable energy development targets for 
2020. However, achieving these targets 
will depend on several factors, including 
well-trained and highly skilled personnel, 
cost reductions in technology and effective 
distribution of power generation (electric 
grids) through electric utilities. In addition, 
international co-operation since the 1990’s 
has recognized the importance of 
improving energy efficiency in China’s 
industrial sector, ranging from pilot projects 
involving industry-government power 
contracts to the development of energy 
service companies nationwide, including 
energy performance standards for the 
Chinese industry. When China’s energy 
consumption surged in 2000, a landmark 
renewable energy law enacted in 2005, 
supported continued expansion of renewable 
energy as a national policy objective. 
China obtains roughly 8% of its energy and 
about 17% of its electricity from renewable 
energy like wind power and solar power 
(biomass and biofuels). These percentages 
are projected to rise to roughly15% and 21% 
respectively by 2020. 

In terms of energy consumption, China 
is now second only to the United States. It 
is the world’s NO.1 consumer of coal, steel 
and copper and as a consumer of oil and 
electricity; it is second only to the United 
States. Given China’s vast coal reserves, 
coal is currently China’s main fuel source 
and supplies roughly two-thirds of its energy 
needs. A decision had to be made by the 
Chinese Central Government to exploit such 
an abundant and reasonably inexpensive 
resource, but coal is clumsy, inefficient, low 
grade and hard to adopt to modern energy. 
As China’s coal demand has been rising, 
coal production has been falling behind. 
70% of electricity in China is based on coal 
which is an increase of 19% since 2000. 
Furthermore, through the use of coal over 
the past twenty five years, China has now 
become the largest emitter of greenhouse 
gases in the world. The IEA estimates that 
China, which generates more than 70% of its 
electricity with coal, will build 600 gig watts 
of coal fired power capacity within fifty 
years. The amounts of gig watts are almost 
as much as is currently being generated with 
coal in the European Union, Japan and the 
United States combined. Also, domestic 
supply of coal in China has failed to keep up 
with demand because China’s coal is 
generally located in the remote northern and 
western areas of the country and is quite far 
from coastal cities where energy demand is 
strong. China’s coal mines are old and the 
coal is very deep underground and 
expensive to extract. 

Increased amounts of stimulus funding 
by the Chinese Central Government have 
been directed at massive economic and 
infrastructure development projects in the 
rural areas, including establishing an 
elaborate freeway system and a new 
east-west passenger railway line as well as 
paving existing roadways. Therefore, 
existing tracks for coal transport can then be 
freed for coal transport which is currently 
hampered by congested railways and roads, 
making domestic deliveries of coal 
dangerous, unreliable and more expensive 
than imported coal. 

Since coal based power is directly 
responsible for such a major share of global 
CO2 emissions, it will be imperative for 
China to develop new technologies that 
allow energy to be extracted from coal 
without noxious emissions. Given the 
rapid economic development in China, 
China has become not only a major energy 
consumer, but also a significant energy 
producer. Domestic coal accounts for 
roughly 76% of the total production, 
followed by crude oil at 13%, hydropower at 
8% and natural gas at 3%. Furthermore, as 
coal fired generation and heavy 
manufacturing make up a significant share 
of China’s emissions, the coal boom has 
created many profitable deals. Last year, 
the coal industry made a record number of 
mergers and acquisitions totaling roughly 52 
billion and Chinese state backed firms have 
continued to invest heavily abroad. 
Even though China is one of the 
biggest energy producers and consumers, the 
mentality and perspective of the Chinese 
Central Government reflects a conundrum 
regarding coal. On the one hand, the 
Chinese Central Government is concerned 
with making an efficient contribution to 
energy security in the world markets. 
China has exported over 13 million tons of 
charcoal and over 80 million tons of coal. 
According to President Hu Jintao, at whose 
lunch I had the privilege of attending back in 
Washington, D.C. in late January, “ China is 
closing down a dirty, coal-fired power 
generation facility at the rate of one every 
one to two weeks, putting up a wind turbine 
at the rate of one every hour and has set a 
target by 2020 of reducing carbon pollution 
by 40-45% per unit of gross domestic 
product.” Indeed, China has embarked on  
the adoption of a vast program to build 
hydro nuclear, wind and solar power stations 
to reduce the proportion and amount of 
electricity China would generate using coal. 
However, while China has developed the 
technology to build high technology power 
plants, it comes at the end of a long cycle of 
construction building lower tech coal-fired 
plants as well and construction has now 
slowed dramatically because of the 
economic slump. Furthermore, it cannot be 
refuted that China has adopted a process 
(“Ultra-Supercritical Technology”) that uses 
hot steam to achieve the highest efficiency. 
China has also drastically cut costs by 
building energy efficient power plants 
throughout the country, making it more 
efficient to build a power plant in China than 
to build a less efficient coal-fired plant in the 
United States. 

However, the overall perspective on 
coal echoed by the Chinese Central 
Government is that coal fuels the Chinese 
economy. They believe that if China is to 
continue to generate jobs, economic stability 
and continue to lift people out of poverty, it 
cannot turn its back on coal as a source of 
wealth, no matter how dangerous the mines 
or how dirty the electric generators may be. 
The Chinese Central Government will 
correctly point out that coal powers half of 
the nation’s railways and supplies over half 
of the country’s feedstock. The power 
companies in China are rumored to wield 
great political leverage, much like the 
tobacco and railroad industries did in the 
United States for many years, and as long as 
the power companies do not challenge the 
Chinese Central Government regarding price 
powers on technology, they are allowed to 
expand China’s coal fixed electricity system 
at a relatively modest pace. In short, the 
Chinese power companies have traditionally 
wanted to stay with what they know and that 
would be coal. Furthermore, while the 
power stations currently being built in China 
to feed the new electricity grid is purported 
to be very efficient and less polluting that 
many of China’s older coal plants, coal is 
very cheap and hurts efforts to reduce 
greenhouse gas emissions. 

China is doing a great deal to replace 
old, highly polluting stations by building 
clean state of art coal-fired power stations at 
an average of one a week to feed its 
booming economy, but there is no such 
thing as a clean coal-fired plant. Indeed, 
Changhua Wu, China Director of the 
Climate Group in Beijing, echoes the 
sentiment of many Chinese officials when 
he repeatedly states that “in China you have 
to try everything because of the scale of the 
economy and the speed of growth.” It has 
been argued that China should seriously 
scale back its extensive nuclear energy 
program as a result of the earthquake in 
Fukushima even though nuclear has been a 
part of the picture in China to move away 
from coal. While it is true that earthquakes 
pose a real threat in many parts of China, 
according to Changhua Wu, “all energy 
options have risks” and if China gave up its 
nuclear program in response to Fukushima, 
or at least delayed construction of new 
nuclear power plants, China would 
necessarily have to rely on increased coal 
usage which poses greater pollution and 
environmental challenges for the Chinese 
people which the Kyoto Protocol Agreement 
strives to avoid. Consequently, the costs of 
nuclear power have fallen drastically in 
coastal China, whereas coal involves the 
importation of sources from abroad and the 
expensive transportation of coal from inland 
China over an overextended rail/roadway 
system. These factors necessarily make 
nuclear close to becoming economically 
competitive with coal as it has become cost 
effective for the Chinese moving in the 
direction of nuclear power. This is 
especially true when recognizing that 
China’s earthquake challenge lies in moving 
towards Japanese standards of construction 
as relatively few deaths in Japan resulted 
from the earthquake itself or any radiation 
from the nuclear reactor. Rather, the 
ensuing tsunami resulted in most of the 
deaths. Furthermore, it was not surprising 
when China’s Vice-Minister of 
Environmental Protection, Zhang Lijun, was 
quoted as saying, “ We can learn lessons 
from Japan in the development of nuclear 
power in China.” 

In an effort to alleviate some of China’s 
reliance/addiction towards coal as a major 
source of China’s energy policy, the Chinese 
Central Government has been actively 
looking at other cost efficient alternative 
energy sources. This has led the Chinese 
to seriously embark on an international 
campaign aimed at development and 
exploration of shale gas as part of China’s 
energy strategy focusing on natural gas. 
China is drafting a National Shale Gas 
development plan, studying relevant policies 
and establishing pilot shale gas development 
areas. It is interesting to note that, in my 
discussions with younger Chinese energy 
ministry officials, I found a large degree of 
enthusiasm for shale gas as a cheap, 
relatively cleaner alternative to coal. It 
appears that this attitude is slowly beginning 
to permeate the upper decision making 
levels of the Chinese Central Government. 

The Chinese have targeted North 
America because it has the largest amount of 
shale gas and China recognizes the 
enormous opportunity for shale gas 
exploitation as the gas produced from shale 
has over 40 billion cubic meters which 
accounts for 8% of all the gas production. 
Until recently, China has not carried out a 
comprehensive study on shale gas, but it has 
recently been determined that Sichuan and 
Zhungaer are two areas containing very 
large shale gas deposits. 

China is believed to have significant 
shale gas potential. The preliminary findings 
by the United States shows that the shale gas 
resources in China might be 100 trillion 
cubic meters, the same level as that of the 
United States. According to the Ministry of 
Land and Resources in China (MLR), 
reserves of shale gas that can be mined 
amount to 26 trillion cubic meters. In April 
2010, the MLR announced that the shale gas 
field in Chongqing would be available for 
commercial production starting this year. 
The Ministry of Land and Resources in 
China has a goal of building its total 
production capacity to 3-5 billion cubic 
meters from 10-15 leading shale gas fields 
by 2015 and a further expansion to 15-30 
billion cubic meters from 20-30 fields by 
2020. The goal is for shale gas production in 
China to be equivalent to 8-12% of the total 
annual domestic natural gas output. Besides 
the MLR in China, the energy regulatory 
agency in China, the National Energy 
Administration (NEA), have also begun 
developing policies to support exploration, 
development and utilization of shale gas 
since 2020. Shale gas has been 
incorporated by the Chinese Central 
Government into the “National Energy 
Strategies Toward 2030.” 

When oil prices crashed, most countries 
turned inward, focusing on their respective 
domestic agendas in an effort to minimize 
political fallout. China, on the other hand, 
saw an opportunity to penetrate the oil 
market because the Chinese recognized that 
it would be highly unlikely that the price of 
crude oil would ever be as cheap again. 
Therefore, China embarked on a worldwide 
campaign to seek out new sources of crude 
oil no matter where it happened to come 
from. The Chinese Central Government 
became notorious for making deals just to 
get a cut of future production. China 
National Offshore Oil Corporation, CNOOC, 
paid over 1.3 billion dollars for a stake in 
Angola’s profitable offshore oil fields as 
China recognized Angola’s role as Africa’s 
largest oil producer. Now China’s quest 
for energy security has led them to focus on 
shale gas that will create a huge opportunity 
for U.S. companies to engage in joint 
venture partnerships with Chinese oil and 
gas companies seeking to learn the 
procedures and mechanisms of shale 
production. China’s first step towards 
producing its shale gas resources will be a 
learning experience and right now the 
United States does shale gas exploration and 
production better than any other country in 
the world. 

China has watched the shale gas boom 
explode within the United States for the past 
few years and is looking to emulate the 
efforts of the United States in shale gas 
production. China holds roughly 30 trillion 
cubic meters of shale gas resources and the 
goal of the Chinese Central Government is 
to have about 12% of their natural gas 
production come from shale gas wells by 
2020. However, extracting natural gas from 
the shale is quite difficult and requires a 
little bit of western know-how and 
entrepreneurial skills to understand the 
mechanics of shale gas exploration and 
production which, as I stated earlier, is 
something that companies in the United 
States have been perfecting for many years. 

China is already beginning to penetrate 
the shale gas arena. In 2009, China enlisted 
the help of Royal Dutch Shell to begin its 
first venture in developing China’s shale gas. 
In September 2010, China Petroleum 
Corporation (SINOPEC) signed a joint 
venture partnership with Chevron to develop 
shale gas near Guiyong City. Sinopec’s 
goal is to increase production from various 
unconventional sources, such as shale gas, to 
approximately 2.5 billion cubic meters 
within the next five years. Furthermore, in 
October 2010, CNOOC, China’s biggest 
offshore oil producer announced a deal with 
Chesapeake Energy where CNOOC (China 
National Offshore Oil Company) paid 1 
billion for one third of the state assets of 
Chesapeake Energy in the Eagle Ford shale 
gas site which is located in South Texas. In 
addition, Petro China, the largest oil 
producer in China, said in early February 
that it will pay 5.4 billion for a stake in 
Calgary based Encana Corporation’s shale 
and deep well gas assets. Furthermore, it is 
worth noting that Petro China recently 
announced that the company had finished 
the drilling of China’s first horizontal shale 
gas well, the Wei 201-H1 well, in Sichuan 
province in southwest China. Petro China 
drilled 1,079 meters horizontally at the Wei 
201-H1 well after sinking vertically 2,823 
meters. The conventional wisdom in China 
is that horizontal shale gas wells are more 
productive and have proven to be the most 
commercially viable method of extracting 
shale gas based on the success of shale gas 
development in the United States. Since 
China is attempting to unlock massive 
amounts of shale gas reserves to meet the 
increasing demands of its rapidly growing 
middle class, but because China has not 
been able to access these deposits due to a 
lack of technical expertise, China’s National 
Energy Administration (NEA) is studying a 
policy of setting up pilot exploration areas 
and is attempting to industrialize shale gas 
as early as possible. The Chinese Central 
Government is making a concerted effort to 
make major technological breakthroughs in 
developing shale gas because, according to 
Xinhua News Agency, the Chinese Central 
Government wants to “optimize the nation’s 
energy structure”. It is the belief that China 
could conceivably produce enough clean 
energy to take the pressure off of the coal 
and the automobile industries in China and, 
thereby ensure that shale gas, China’s 
natural gas gamble, becomes a resounding 
success. Sources from the Ministry of Land 
and Resources of China have acknowledged 
that there has been and will continue to be 
public bidding for shale gas blocks in the 
first quarter of 2011. China is keen to kick 
start the sector by introducing more 
competition in the bidding process. 

While China’s natural gas production 
in 2010 stood at 94.48 billion cubic meters, 
the Chinese Central Government believes 
that consumption could reach 300 billion 
cubic meters by 2020. As China pursues 
policies aimed at raising and tripling its 
share of natural gas, as part of raising 
China’s total energy use to 10% by 2020, 
which is up from 4% at present, foreign 
participation, expertise and creativity is 
essential. Once China meets its natural gas 
goals through the development of shale oil, 
foreign participation becomes less lucrative 
and more and more problematic. Bilateral 
co-operation becomes difficult to maintain 
in the long run. Issues concerning 
proprietary knowledge relating to shale gas 
exploration and intellectual property 
considerations will have to be examined in 
the near future. In fact, as previously stated, 
China still faces significant hurdles to 
getting gas out of the ground on its domestic 
soil, transporting gas and delineating the 
size of the reserves. However, the most 
pressing issue, moving forward, is clarifying 
the legal framework for contracts. This 
is to ensure protection of intellectual 
property rights/technologies of foreign 
companies involved in the shale gas sector. 
These issues will certainly be raised in the 
near future now that the United States and 
China recently signed a co-operation 
agreement last November to jointly appraise 
shale gas reserves in Northern China and 
Jiangsu province. This issue is further 
highlighted by the fact the Statoil, 
headquartered in Norway, has been giving 
serious consideration to teaming up with 
Sinopec on investigation and study of 
offshore oil and gas reserves in China. 

China recently raised interest rates in 
response to Europe’s worsening debt crisis. 
For example, in Ireland, the housing market 
forced the country to take over three large 
financial institutions and a financial bailout 
of Greece put pressure on commodities and 
raised concerns about diminished demand. 
The recent earthquake and tsunami in Japan 
have also contributed o global uncertainty in 
the oil and commodity market. Furthermore, 
the shale gas sector in China currently lacks 
policy support for certain tax breaks and 
other financial incentives currently offered 
to other sectors in China. The Chinese 
Ministry is currently pushing the Chinese 
Central Government to extend the same 
incentives already offered to coal methane 
developers by pushing for the establishment 
of a renewable industry services system 
along with tax incentives, such as 
depreciation deductions on equipment, 
waiving the corporate tax rate for a fixed 
period of time and a tax holiday. However, 
insufficient pipeline infrastructure in China 
currently hampers shale gas development 
and severely impacts market prices. 

Therefore, when assessing the 
long-term projections for shale gas 
exploration, it must be recognized that 
China will increase its natural gas demands 
by 77% in 2015 from this year as China 
aggressively pushes for the use of cleaner 
burning fuels to curb carbon emissions. 
In the long run, shale gas has a large 
potential for supplying the Chinese market 
and its development will continue to attract 
much interest from many countries, 
including the United States. China holds the 
world’s third largest coal reserves after 
Russia and the United States and China’s 
environmental restrictions for shale gas are 
less strict than in other countries. In China, 
most gas shale gas fields are located in 
thinly populated areas, compared to Europe, 
which makes shale gas development and 
exploration very lucrative for foreign 
companies who are increasingly entering the 
Chinese shale gas market under joint 
ventures with Chinese companies. However, 
serious water shortages in China may pose a 
problem for shale gas exploration as large 
amounts of water are essential to the 
development of shale gas. Furthermore, in 
the United States, exploitation of shale gas is 
based on the price which is roughly in the 
$100 range. The industry ebbs and flows 
based on the market price. In China, it is 
well established that the Chinese Central 
Government is able to control many 
economic factors that make long-term 
projections for shale gas exploration in 
China very strong. These factors adopted by 
the Chinese Central Government to support 
the development of shale gas include 
establishing sustainable and stable market 
demand through favorable price policies, 
mandated market share policies,, 
government investment and government 
concession programs. In an effort to 
ensure the projected success of shale gas 
exploration, the Chinese Central 
Government also has the ability to set 
renewable power tariffs and cost sharing 
policies as well as increasing fiscal input 
and tax incentives. Accelerating 
technological improvement and industry 
development through the integration of 
various renewable energy technology 
resources, such as research institutes, are 
additional options that the Chinese Central 
Government can implement at its own 
discretion. 

In conclusion, the future of China’s 
shale gas industry is enormous, given 
China’s 2015 natural gas demand may rise 
to 77% and the Chinese Central Government 
is making concerted efforts to encourage 
foreign participation in the development and 
exploitation of China’s shale gas industry. 
China has further taken the initiative of 
investing in various shale gas projects in the 
United States and Canada in an effort to gain 
the proprietary understanding of the 
technology involved in shale gas 
development. As China’s national oil 
companies increase their shale gas activity, 
they will look for partnerships in the initial 
phase of development, creating a window of 
opportunity for qualified foreign players to 
gain access to China’s market. China 
recognizes shale gas as the clear alternative 
to coal in an effort to reduce its carbon 
emission footprint and move away from coal 
fired power plants towards a cleaner, safer 
technology in an effort to meet the 
increasing demands for energy among the 
rapidly growing middle class in China. 


No comments:

Post a Comment