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The world’s most populous country is turning to shale gas to help solve its energy woes. China aims to reach a commercial shale production of 230 Bcf/y by 2015.
Arrivals at the Shanghai Pudong International Airport soon see China’s megacity – 23 million people on streets clogged with automobiles, shiny new apartment buildings and dramatic neon nightscapes.
This haven of the middle class, visitors might assume, is the face of China’s energy problem – a voracious appetite for power use.
In 2011, China alone was responsible for 71% of global energy consumption growth, according to BP. It leads the world in power consumption.
But the middle class isn’t the problem, said Trevor Houser, a partner at Rhodium Group and member of the Council on Foreign Relations and the National Committee on U.S.-China Relations.
China is changing. Its economy will grow more slowly than the breakneck pace of the past. Gradually, energy use is expected to change as China looks toward unconventional fuels, especially shale gas, and other alternatives.
Recently, the Party Congress has modified its policy on shale development to cut its reliance on coal. Analysts say there simply isn’t enough in the world to continue to meet the country’s long-term energy needs.
And Chinese leaders have accepted that they lack the know-how to develop their shale gas.
Cities such as Shanghai and the middle class in general represent “China’s future energy challenge,” Houser said.
Rather, it is Chinese industry, including a mindboggling production of steel and cement in a run up of urbanization that has emptied the pantry. Industry is responsible for 75% of the country’s energy demand, said Houser, who spoke Nov. 9 at a Rice University investment and commodity conference.
“Shale gas has a bright future in China – in the long term,” said Houser, who negotiated several bilateral U.S.-China energy agreements, including the U.S.-China Shale Gas Initiative as an advisor for the State Department.
“Between now and 2020, I don't expect it to add much overall Chinese gas supply,” he added. “The government is interested in developing it, and that has led to new opportunities for US and Canadian firms, but it will take time.”
China has put a spotlight on shale gas development. In 2007, China became a net gas importer, with about 25% of its demand met by pipeline and liquidized natural gas (LNGs) imports, according to Shell.
The government’s five-year plan aims to go from zero commercial shale gas production in 2011 to 230 Bcf/y by 2015, according to the US Energy Information Administration (EIA).
By 2020, China wants to produce 2,100 Bcf/y. In 2011, the US produced 23 Tcf of gas, according to EIA.
To give the initiative a shove, in October, Chinese officials announced that foreign investors would be allowed to participate in its shale gas industry. In 2011, outsiders were excluded from shale gas licensing. In making the change, leaders acknowledged that China needs to gain expertise to extract what is an estimated 1,275 Tcf of recoverable shale gas.
Earlier this month, China took another step toward accelerating development by announcing companies would receive subsidies for every cubic meter of shale gas developed from 2012 to 2015. In US dollars, the subsidy amounts to about 6.4 cents, which would mean that targeted production of 2015 would cost $150 million. That’s significant in a country where 2011 GDP per capita is $8,400. US GDP per capita income was $48,300, according to the CIA World FactBook.
Shell, for one, is working to develop a large-scale hydraulic fracturing industry in China. The energy giant is spending $1 billion a year on China upstream, Andrew Brown, upstream international director for Shell, told analysts on Nov. 15.
“China is a country with enormous potential for tight and shale gas,” Brown said. “In the past three years, we have rapidly built up our onshore acreage in China and are entering the offshore.”
Brown said China consumed 12.6 Bcf/d in 2011, second only to the US. In the first seven months of 2012, year to year gas demand increased 12%.
“We expect the Chinese gas market in 2030 to be around the same size as the European gas market is today at some 54 Bcf/d,” Brown said.
However, while China gas development pace is accelerating, logistical challenges abound and infrastructure will be needed to bring any gas to customers, Brown said.
The move toward alternatives, albeit incremental comes at a time of great challenge for China.
Leadership is obsessed with escaping the stagnating economic condition called the Middle Income Trap.
China wants to “get to the upper income status that Japan, Taiwan, and Korea have been able to achieve,” Houser said.
Between 1978 and 2000, the Chinese economy grew at 9% while energy demand grew at 4%. After 2001, economic growth continued about the same, but energy demand growth surged to 13% a year.
But now the country’s GDP growth has slumped to between 7% and 8%. More startling, its power demand is growing at 2%.
“For most of the past decade, power demand has grown at 3 to 4 percentage points faster than the economy as a whole,” Houser said.
China’s longer-term growth depends on a transition to a consumer-driven economy, according to a November BernsteinResearch report on China’s economy in 2013.
China is in the process of rebalancing its economy, Houser said.
The power-needy nation now is “at that turning point now where Asian tigers all turn down and start a slow path down the mountain,” he said.
Fond of skiing terms, Houser puts it like this: The country can either take the easy bunny slope down the mountain or the “Latin American double black diamond trip” – the dangerous and difficult path.
Avoiding economic stagnation “means a decline in investment, rate of growth in investment relative to other factors in the economy and it means sustaining current consumption growth in real levels, thus increasing its share of GDP.”
Energy use suggests that is happening, he said. Power demand for the “industrial sector has fallen off a cliff.”
Year-to-year power demand growth in the 2011 was 12%. “It’s 3% now,” Houser said.
However, services and residential sector power demand growth is fairly good.
“What we’re seeing is a change in the composition of growth as China comes out of the Supercycle over the past 10 years, starts to rebalance the economy and becomes less commodities and energy intensive as a result,” he said.
Though the economy is recovering, Houser expects the “energy and materials intensity of Chinese economic growth to come up a little bit from where we are right now.
“But it’s never going to return to the levels we’ve seen previously,” he said.
Slower growth in China will be felt both domestically and globally, producing an excess supply capacity in industries such as coal and steel sector, BernsteinResearch said. Oil demand growth is expected to slow from around 7% during the past decade to around 5% over the next five years. However, China’s oil needs will account for 40% of global oil demand growth.
In short, China’s energy demands aren’t going away.
An August Goldman Sachs report by lead analyst Abby Joseph Cohen said China will remain a significant user of energy, even at a slower pace of economic growth.
“Driven by the burgeoning middle class, energy consumption is set to remain robust. There is still significant room for growth in residential energy demand,” Cohen said.
Per capita energy use in China remains is far below the levels of developed countries. EIA projects that by 2035, China will account for nearly 25% of global energy consumption and energy consumption could reach eight times the levels in Japan, seven times the use in Brazil and close to four times India’s consumption
Other estimates point to as many as 370 million additional vehicles in China by 2030. Currently, there are about 50 million, Houser said.
“Make no mistake. China’s going to use a lot of energy in the years ahead,” Houser said.
Contact the author, Darren Barbee, at email@example.com.