The Achilles Heel of China’s dramatic economic growth has been its reliance on imported energy, everything from oil to natural gas to coal. Quite aside from draining China’s treasury to pay for energy imports, the Chinese government frets that such reliance on imports diminishes the country’s independence by tying its prosperity to political turmoil in the Middle East and Africa while making those imports viable to interdiction by U.S. naval forces in the event of worsening relations with Washington.
Developing indigenous energy resources has accordingly become a high priority for Beijing, and this is most evident in the country’s decision to exploit its vast shale oil reserves.
The International Energy Agency reported that China, which consumed about 4.7 million barrels a day in 2000, will consume about 9.7 million barrels a day in 2012. That growth has been among the factors pushing world oil prices from near $30/barrel in 2000 to 2012 prices ranging between $80 and $110.
China’s oil imports for 2012 are set to reach 500 million tons, a 5 percent increase from 2011, during which, according to China’s National Bureau of Statistics, domestic production was 204 million tons of crude oil, up only 0.3 percent from 2010. Beijing-based Research Institute of Petroleum Exploration Development expert Ding Shubai lamented, "We imported 240 million tons of crude oil from foreign countries last year, equivalent to about 57 percent of our entire demand. This number is continuing to increase."
A partial solution? Oil shale - China has roughly 240 billion tons of accessible oil shale reserves. According to data developed by China's National Energy Administration, about 10 million tons of oil can be produced from these reserves annually.
Ding is in no doubt of the necessity to produce petroleum from oil shale, saying, "The oil shale industry is essential to safeguarding China's energy security."
And China intends to exploit its shale natural gas as well. Its technique of choice is hydraulic fracturing, or “fracking,” an increasingly controversial process in the United States, which currently leads the world in developing the technology.
The U.S. Energy Information Administration estimates that China contains the world’s largest reserves of shale gas, with 1.275 quadrillion cubic feet of “technically recoverable” shale gas. The U.S., by contrast, has a paltry 862 trillion cubic feet of estimated shale gas reserves.
On 9 June state-owned oil firm Sinopec, China's number two oil company, began drilling the first of nine planned shale gas wells in Chongqing, expecting by year's end to produce 11-18 billion cubic feet (bcf) of natural gas in China’s first commercial-scale shale gas production.
By 2020, China intends for shale gas to provide 6 percent of its energy needs. In its 12th Five-Year Plan, covering 2011-2015, the Chinese government outlined a goal to produce 229.5 bcf of shale gas within the next three years, with a goal to increase shale production at least 1,000 percent between 2015 and 2020.
But where is that advanced technology going to come from? China has set its sights on U.S. firms. In 2010 China’s state-owned China National Offshore Oil corp. initialed a joint venture with U.S. shale gas leader, troubled Chesapeake Energy, while in January Sinopec, purchased a one-third stake in several new ventures of shale gas industry pioneer Devon Energy for $900 million and committed itself to cover $1.6 billion of future drilling costs. Two months later, Shell signed China's first product sharing contract for shale gas, hoping to outpace its competition. When asked if Shell remained committed to a plan to invest $1 billion annually in China's shale gas over the coming few years, Lim Haw Kuang, Shell's top China executive, simply said, "Yes, yes and yes."
Thinking big, Shell is also planning $12.6 billion refinery and petrochemical complex – which could become China's single largest foreign investment.
And, seeking to tap more foreign expertise, China's Ministry of Land and Resources is planning to attend the 3rd Annual World Shale Oil & Gas Summit and Awards, taking place on 18-21 September in Houston. Among those speaking will be Professor Pan Jiping, Director of Oil & Gas Resources Center for Strategic Studies of China’s National Ministry of Land & Resources; Professor Liu Xiaoli, Deputy Director of Center for Energy Economics and Development Strategy, Energy Research Institute of China’s National Development and Reform Commission and Zhao Qun of the New Energy Department, Research Institute of Petroleum Exploration and Development, Langfang, PetroChina.
And one can expect to see energy issues increasingly dominating the U.S. presidential race. Republican candidate Mitt Romney has proposed an energy program that ensures U.S. energy independence by expanding energy companies’ access to previously off-limits offshore coastal waters and onshore resources, including federal lands, to be tapped through hydraulic fracturing, speeding up the permit procedures to greenlight new energy projects, improving energy partnerships with Canada on pipelines (including approving TransCanada’s controversial Keystone XL pipeline, blocked by the Obama administration) and other infrastructure and rolling back burdensome regulations.
But all is not necessarily smooth sailing, as the Presidential debates will focus on the economy, with the lopsided trade deficit with China being a major element in the government’s spiraling debt.
Not all of Wall St. is onboard with Romney’s energy policies. A 23 August editorial in the business magazine “Forbes,” entitled, “Why China Will Stop U.S. Energy Independence,” asserts that China will increase its acquisition of U.S. energy assets, writing, “Beijing is not going to let North America out of its acquisition sights. If anything, it will become one of its key suppliers.” Far from arguing about limiting Chinese investment however, the editorial continues, “Rather than shutting up shop to overseas investment (and missing very lucrative export potential), the U.S. should be leading the charge to keep energy as a globalised commodity.” In essence the author argues that increased Chinese investment will flatten out volatile oil price swings, concluding, “China has a physical (OECD) stake in the virtual energy world to iron out some inconvenient curves. When cooler heads prevail (post November 2012), that’s hopefully what will happen. China will discretely, but effectively stop U.S. energy independence folly in its tracks. Go the other way - trying to forge energy into a national good for national consumers at heavily distorted prices - and we’ll be on a very long, dark, and ultimately futile road indeed.”
T’will be interesting – and in the meantime, Beijing is whipping out its checkbook.
By. John C.K. Daly of Oilprice.com