China, Fracking, and Environmental Leadership?

Over the past decade, China has wowed the world with its astonishing, breakneck pace toward industrialization. But relative to other industrialized giants and shale-gas rich states, China struggles with coal-burning emissions and exponential leaps in domestic energy demand even while hosting the most shale gas reserves worldwide (1/5 of known global deposits).

China has 107 trillion cubic feet of proven natural gas reserves and is one of only five countries with proven natural gas reserves of more than 100 trillion cubic feet…The amount of technically-recoverable shale gas in China is 1,275 trillion cubic feet, 50% more than the 862 trillion cubic feet in the United States. (Edwin Lee)

Although neighboring country Russia has ridiculed what it calls the “shale gas bubble” and is blatantly disinterested in developing unconventional energy reserves, China is eager to emulate American successes with shale gas, and keeping true to its reputation as a global leader in infrastructure growth, the country has set seemingly unrealistic energy development goals that include boosting natural gas to 8% of domestic energy consumption by 2015 and 10% by 2020. In an energy “white paper” released by China’s State Council on October 24th, 2012, advisers made recommendations for growth of the shale gas industry to a production level of at least 6.5 billion cubic meters of shale gas by 2015. 

Fracking in ChinaPresently, natural gas barely accounts for 5% of total energy production in China (a figure well below the global average). Compare that to coal –  at 60% of China’s energy mix – and it becomes clear why other countries are actively encouraging China to go the shale gas route. Provided that the gas is extracted, transported, and used responsibly, the skies over China’s polluted cities could begin to clear. If China met its energy development goals air quality could realize significant improvement. In Beijing alone, China plans to retrofit over 260 coal power plants with natural gas burning turbines by the end of 2014.

Despite the potential upside of reducing pollution from coal fired power plants in China, boosting natural gas production may not be a net positive. China’s record setting pace of development could far exceed the speed of their environmental regulatory process and the prospect of easing environmental problems by developing shale gas in China could be dubious at best.

Stumbling blocks to shale gas extraction

In spite of external encouragement and investment, China will struggle to develop shale gas – indeed, the obstacles are such that investors have expressed worry about the high costs, risks, and uncertainties associated with the industry that are unique to the Far East.  However, if it doesn’t successfully develop these reserves, China is set to import 79% of its oil by 2030 – a costly predicament for its economy. Below is a list of the hurdles that impede the Chinese shale gas rush:

  1. Water issues & the unfavorable location of shale plays: Provinces in North China and Northeast China hold 46% and 20% of the country’s total shale gas reserves respectively. These also happen to be China’s most arid regions that regularly struggle with water shortages. Thus, unless drilling companies manage to pipe water in from hundreds of miles away or miraculously treat unusable polluted river water for operations, it’s unlikely that these deposits can be tapped at all. 40% of China’s rivers are seriously polluted, and to frack with polluted water is untenable, leading inevitably to the corrosion of steel well casing, water contamination, water flow alteration, and a lack of control in the process. On the other hand, water shortages may then prompt China (out of necessity) to explore niche technologies – new water treatment systems, propane gas fracking, nitrogen fracking, or other “waterless” methods. If the Chinese don’t, low water supplies will impede their fracking industry; the U.S has nearly 5 times as many freshwater supplies as China. In fact, with 20% of the world’s population, China only contains 6% of global freshwater supplies.
  2. Geological issues: Not all shale is identical; a country that has immense shale gas reserves may find that high concentrations of clay and kerogen will make the shale far less productive and harder to frack. This is exactly the case in China’s shale plays. In the south and southwest, the geology and terrain isn’t ideal – shale plays are older and less porous, and lie beneath mountain ranges that will require higher capital investments for access roads and pipelines. The shale deposits in China – particularly Sichuan –  are also far deeper underground than American shale plays, sometimes 3-4,000 meters deep. Deeper drilling and the associated costs may also impede companies that face high capital investments and very little profit or returns in the short-term. Findings from Lexology estimate that these conditions will make each fracking operation in China nearly 10 times more expensive than a typical US operation.
  3. Lack of know-how, experience, and infrastructure: Only two Chinese companies (PetroChina and Sinopec) have experience with shale gas development, and other companies have expressed doubts about meeting China’s energy targets due to both the lack of expertise within the country and minimal access to foreign expertise (the government is slow to award contracts to foreign or private companies).  Indeed, China has had little domestic experience with horizontal drilling and other advanced extraction technologies. And while the US has an established network of gas pipelines and LNG liquefaction terminals to facilitate transport and export of natural gas, China does not. Existing natural gas pipelines are controlled mostly by PetroChina, which discourages other developers to compete.
  4. Seismic risks: One of the richest regions for shale gas, the Sichuan basin, doubles as the most vulnerable to seismic activity. Indeed it lies along what seismologists call the largest “continental collision” in the world, where hundreds of quakes occurring near test wells have already been recorded. Over 2,700 earthquakes of varying magnitude were documented near one particular injection well in Zigong over a 3 year period. Government regulations (what few there are) do not require any seismic surveys from companies and simply rely on “best practices”.

Fears about under-regulation

Oil & gas are regulated by 6 different government bodies in China, but there are only 2-3 formal rules that actually govern shale gas extraction to date. With no rules on groundwater protection in place yet, critics note that it would take 3-5 years to add them (or any new provisions and laws) to China’s environmental lawbook. In a similar vein, China’s pollution standards do not include methane, so there would be no legal limit on methane emissions at shale gas wells. Others are worried that the lack of regulation will lead to “water grabbing” on the part of companies, where there are already shortages faced by Chinese citizens across the country. Finally, in the recent coal bed methane investment flurry, companies were discouraged by the overlapping rights of to land the government gave to both mining companies and methane producers in the 1990s. Companies worry that the Chinese government may do the same thing with shale gas rights and land leases.

Acquiring shale expertise

Even conservative estimates of China’s recoverable shale gas reserves are higher than U.S deposits. And evidently, as of April 2012, China had already successfully completed 58 wells. But safe and efficient fracking requires more know-how. State-owned oil and gas companies are addressing the lack of expertise by acquiring major stakes in U.S fracking tech companies, such as Devon Energy Corp. These same oil companies are working jointly with other foreign big shots for shale surveying, including Shell, BP, Chevron, and ExxonMobil. Shell alone plans to invest $1 billion in China’s shale gas industry, and already enjoys a joint lease with China’s National Petroleum Corporation (CNPC) for 3,500 km of land in the Sichuan province. These trends reveal a shift in China’s economic and energy strategies; previously China would obtain the rights to needed resources in another country and, in return for the imports, allow access to Chinese markets for that country or company. Now, the Chinese is offering its market in exchange for oil & gas extraction expertise to tap its own resources – in fact, 70% of coal bed methane exploration in China was funded by foreign companies.

China’s Fracking Future

China is entering the shale game relatively late. Although they are currently behind the curve in terms of fracking technology development, they may end up ahead of the curve in terms of environmental protection. The United States shale gas revolution began well before any reputable studies about accompanying risks were made clear. This has caused numerous purported problems in many areas of the US. China may be able to learn from mistakes made by the early adopters. For example, China’s Sichuan region (currently earmarked for major drilling operations) contains 40% of China’s shale gas, but is also inconveniently the most seismically active region in the country. A recent revelation on the topic of hydraulic fracturing is its link to increased seismic activity. 

It is unclear whether or not China’s hunger for cheap energy will outweigh their desire for a clean and healthy environment. China may throw caution to the wind and proceed with development. However, at least they’ll have the benefit of knowing some of the risks ahead of time. Facing a country wide air pollution crisis and with natural gas prices in the Far East being three times higher than in the U.S, China is highly motivated to broaden its energy mix, cut coal emissions, and grab a profitable slice from the global shale gas cake. The question is, will they get to have their cake and eat it too?

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