The global natural gas glut could get much worse if China has its way.
The spot prices for liquefied natural gas (LNG) have plunged in recent years, falling by more than 75 percent from the 2014 highs. Too much supply has run headlong into a market that has seen demand slow significantly.
But China could make things much worse. In an effort to find a domestic source of energy, and clean up its horrific air pollution problems by shutting down coal plants, the top state-owned energy companies are scrambling to develop shale gas.
China has been trying to develop shale gas for several years, but has struggled because the geology is complex, there is a dearth of infrastructure in places where the gas is located, and water availability issues have also made development difficult. China is persevering, however – Sinopec has announced a goal of doubling production within five years, The Wall Street Journal reports. That would take production from roughly 2 to 4 billion cubic feet per day by 2020.
The logic for state-owned companies like Sinopec is obvious. Oil production from its aging fields is falling, so they are venturing into new markets. “By growing gas production they are effectively trying to mitigate what’s happening on the oil side of the business,” Neil Beveridge, an analyst at Bernstein Research, told the WSJ. Ramping up shale gas “looks like more of a volume strategy than a value strategy,” he added. Related: What’s Next For Oil - Could This Be The Start Of A Correction?
In Sinopec is successful, the implications would reverberate beyond China’s boarders. If China ramps up shale gas production, it might not need nearly as much imported LNG as everyone expected. That would put billion-dollar investments at risk, such as ExxonMobil’s recent $2.5 billion offering for InterOil, a company that has gas assets in Papua New Guinea and will allow the oil major to expand LNG exports from that country. Or, Royal Dutch Shell’s $54 billion purchase of BG Group could turn out to be a major loser if LNG markets remain depressed for years to come, something that would be more likely if China succeeds in developing a successful shale gas industry.
For now, substantial hurdles remain. Sinopec is still learning shale drilling techniques and infrastructure needs improvement. Sinopec boosted output by 10 percent in the first half of 2016 compared to the same period a year earlier, but it is not on track to hit its 18 percent growth target for the year, according to the WSJ.
By Charles Kennedy of Oilprice.com
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