Shale resources hold answer to China’s LNG supply

By Lin Boqiang Source:Global Times Published: 2018/1/2 23:08:40

Illustration: Peter C. Espina/GT

China has shown its determination to tackle pollution by shifting from coal to natural gas. But the government is not solely responsible for the gas supply shortage this winter. Oil and gas companies didn't expect or plan for the rapid growth of natural gas demand.

The shortage is temporary. But in the long run, China has to exploit its own resources to build a new energy structure.

The manufacturing industry in China rebounded in 2017, which drove up energy demand - not just for natural gas but also for coal and electric power. Natural gas demand expanded 15 percent in the first half of 2017, according to industry data. A majority of the increase was for the industrial use. Even without the coal to gas conversion project, a rise of more than 10 percent in gas demand was certain.

The recent rise of the liquefied natural gas (LNG) price is unsustainable, and it is likely to fall sharply. LNG will be in excess globally until 2020, according to International Energy Agency. China alone cannot push up the LNG price while prices in other countries remain stable. China has brought in more LNG through imports and pipelines. Once the new supplies fill the shortfall, the price will fall back to its original level.

There is sufficient gas supply in the short run. In the long run, China cannot bear high dependency on the international market. China can only produce half of its gas demand, so the majority of consumption and increased supply will have to rely on other countries. Global price changes will greatly affect China.

Moreover, in terms of energy security, because most of China's LNG imports are through bilateral pipelines, other countries always have a means of cutting gas supply to China.

If the Chinese government is determined to have a 15 percent to 20 percent LNG increase, it must develop its own resources, shale gas in particular. China is No.1 in shale gas reserves.

The US has set an example when it comes to shale oil utilization.

The success in the US can be seen as a two-stage process. When the international crude oil price was more than $100 per barrel, capital flowed into the shale oil business. With the cost at about $50 per barrel, the profits were huge. Later, the price of crude oil fell sharply, so the money stopped coming in, which forced companies to lower costs.

In developing shale resources, stage one is attracting more capital in search of profits. Stage two is cutting costs to avoid losses. Shale oil helped keep the global oil price at $50 to 60 per barrel, which led to low energy prices in the US.

When China began to consider developing shale gas, the crude oil price had already dropped, and the window to attract capital into shale gas exploration had closed. There are only a few companies producing shale gas in China because the cost outweighs the market price.

The current shale gas reserve in China can meet domestic energy needs. The key question is how to draw capital into the sector. Given the current cost and profit ratio, no company is willing to get in. This will also lead to a downward spiral. Having fewer participants means costs are less likely to fall.

The low oil price in the US is due to competition among many companies. China needs more people and companies to join the shale gas industry to boost technology advancement, hence cutting costs. Therefore, more incentives should be given to companies.

In the early stages of shale gas development, the government should provide policy support and subsidies for this industry. Shale oil and gas are vital for Chinese energy security, even more than wind and solar power. Policy support and subsidies will bring more companies into the game. China may be able to copy the US success if the government has the courage to create an environment for the prosperous development of shale resources.

The author is director of the China Center for Energy Economics Research at Xiamen University.


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