Shale gas production plans advanced by Chinese government may be overly ambitious

The bulk of China’s shale reserves may not be accessible for some time.

Given the success of shale development in the United States, it should come as no surprise that oil and gas companies and government officials in other nations are interested in exploring their own reserves.

China is currently in the earliest stages of this process. The ruling Communist Party, which derives much of its legitimacy from its ability to drive ongoing economic growth, has made the development of domestic energy sources a priority, as the consistency of fuel supplies is critical to maintaining stability during a period of economic expansion.

The Wall Street Journal cited a plan to more than double the proportion of electricity that is generated using natural gas – currently about 4 percent – by 2020. And, there have been some signs of progress, with Chinese gas production reportedly rising by more than 6 percent in 2012. However, the news source still seemed to pour cold water on the government's ambitious plans, suggesting the goals it has set for production in coming years will be difficult to achieve.

In an article for Energy Trends Insider, contributor Elias Hinckley also expressed doubts that China's foray into unconventional production would go as smoothly as the Communist Party's most recent five-year plan would suggest.

Development is certainly not being held back by a lack of reserves. The U.S. Energy Information Administration (EIA) has estimated that China contains approximately 1,275 trillion cubic feet of shale gas that is recoverable using contemporary technology. However, Chinese firms do not necessarily have access to the tools needed for the job.

As Hinckley noted, much of this gas is located in areas where the geological conditions are quite prohibitive. At the same time, there are other issues restraining the growth of China's unconventional gas industry, which one EIA analyst has referred to as being in "nascent stages of development."

Contrast between Chinese, U.S. energy policies may explain disparity in development

In an op-ed piece published by the New York Times, Christof Ruhl, chief economist at BP, asserted that government policies and economic conditions are holding back Chinese shale development more than any other factor.

"The dramatic rise in shale-gas extraction and the tight-oil revolution happened in the United States and Canada because open access, sound government policy, stable property rights and the incentive offered by market pricing unleashed the skills of good engineers," Ruhl said.

The economist added that he believes China, India and other emerging economies may be slow to develop their shale gas resources "because none of these markets has the conditions in place to encourage the kind of private-sector drive that has made the gas revolution so dramatic in the [United States]."

Neil Beveridge, an analyst with Bernstein Research, told The Journal that he saw the problems cited by Ruhl on display during the Chinese government's most recent auction of drilling leases. He said it seemed to be "more of a land grab than an effective policy to open up acreage."

Ultimately, much of the technology and expertise that will be required to support effective development of Chinese shale resources may need to come from the U.S. energy industry. In addition to advanced drilling equipment, Chinese companies will likely need to rely on experienced international firms to handle drill stem testing and other delicate operations, such as management of frac flowback.

Chinese national oil companies are already engaged in discussions with major international oil companies. According to a report from MarketWatch, Shell recently signed agreement to develop shale gas in a partnership with the China National Petroleum Corporation.