China Kicks Off Hunt for Shale Gas

Sinopec, officially China Petroleum & Chemical Corp. (NYSE:SNP), has initiated a program to evaluate shale gas deposits in the southern part of the country. Estimates of the size of the potential resource are about 900 trillion cubic feet, more than 9 years total demand at current Chinese usage. The company hopes to produce about 88 billion cubic feet of gas within five years.

Sinopec has been in discussions with BP plc (NYSE:BP) since January about developing the country’s shale gas resources, but it’s not clear that BP is involved in this first project. BP is reportedly helping Sinopec assess two other potential shale gas deposits. Royal Dutch Shell plc (NYSE:RDS-A) has also signed a 30-year production-sharing contract with China National Petroleum Company, the country’s state-owned energy giant, for development of shale gas

Natural gas is important to the Chinese economy and demand for the fuel has grown faster than demand for crude oil or coal. By 2020, the government expects the most populous country to burn about 10 trillion cubic feet a year, less than one-half current US demand of more than 22 trillion cubic feet.

China’s demand for energy is met chiefly with coal, which accounts for 68% of supply, crude oil with 19%, and natural gas with just under 4%. In 2009,  China produced about 3 trillion cubic feet of natural gas, an amount equal to 92% of consumption. To fill the gap, China imports gas from Russia and Central Asia, mainly Turkmenistan, by means of pipelines. The country also imports relatively small quantities of LNG.

As with crude oil, China does not want to export dollars in exchange for energy. And, unlike crude oil, China has a potentially large domestic supply of shale gas and coal bed methane if the deposits can be developed. The government’s goal is to shift 10% of energy supply to natural gas by 2020.

The country also wants to reduce CO2 emissions, and natural gas generates less than half the emissions of coal.

Natural gas consumption is set to soar, with one Chinese expert claiming that for “next 100 years, natural gas will be the basic energy to support China’s development.” And there’s no significant reason that his prediction can’t come true.

Paul Ausick