August 03rd, 2012 | Caixin Shale Gas and the Invisible U.S. Hand
The development of a new source of energy in America has quickly blossomed for reasons linked to an open mark, and the Chinese government should take notice
The American shale gas revolution gave rise to an investment boom in the unconventional oil and gas industry globally. China has yet to extract a single cubic meter of shale gas. However, thanks to insatiable energy demand and abundant shale gas reserves there has been widespread enthusiasm for China’s shale gas future. In the last couple of years, China has hosted the largest number of forums and summits on shale gas compared with other countries globally. The country aims to achieve shale gas output of 6.5 billion cubic meters by 2015. This means hundreds of billions of yuan will be invested in this industry. If it succeeds, China will grasp its last straw in the face of slowing GDP growth.
Since 2005, American shale gas output has increased 47 percent per year. In just six years, it shot up from just 1 percent of total domestic energy consumption to 25 percent. I’m not sure if in the history of energy development there has ever been a single source of energy that has expanded so rapidly. However, the principles of economics tell us that no growth is without limits. When demand is greater than supply, the price of the goods rises. In response, investment in production capacity to meet demand increases. On the other hand, if supply is greater than demand the price of the goods falls and investment also falls.
The price of American shale gas has already fallen to US$ 2.4 per million British thermal units, or 0.6 yuan per cubic meter, far below the average production cost of US$4 per million British thermal units. As the American shale gas boom has matured, it has reached a bottleneck phase.
Excessive development and investment in American shale gas has led its price on a steady path downwards. Many small and medium producers are struggling to survive. Either they shift their business to products with better margins, such as tight sands oil or shale oil, or they sell their production capacity and close shop. In such circumstances can further investment in American shale gas really be sustained?
Compared to conventional natural gas, shale gas production relies on heavy drilling of many wells and subsequent hydraulic fracturing to aid in releasing the gas. Without adequate investment, the number of wells and the “fracturing” technique will be inadequate and it will be very difficult for output to grow.
Last month, I attended the Asia Shale Gas Summit 2012 in Shanghai. At the summit, an American shale gas expert remarked that the future growth of shale gas in the United Sates depends on whether or not natural gas continued to grow as a percentage of American energy consumption. Up until now, one of the main reasons for the rapid growth in American shale gas was the declining production of conventional natural gas, rather than increased consumption of natural gas overall. Whether the United States can maintain this growth momentum in shale gas hinges on three factors: the scale and speed of the shift from coal-powered electricity to gas powered electricity; the scale and speed at which natural gas replaces oil as a fuel for transportation; and the scale and speed at which the United States goes from being a natural gas importer to being a natural gas exporter.
These changes are not to be realised easily and will require serious implementation, large amounts of capital and fairly lengthy time frame. Of all three, becoming a natural gas exporter should be the easiest. Producers are eager to tap the export market and the liquefied natural gas (LNG) technology that makes shipping gas across the globe possible is available. Furthermore the United States has a significant price advantage over other producing countries and is sitting on large reserves at a time when there is strong demand throughout the rest of the world.
However should the United States choose to allow large-scale natural gas exports they will no longer be operating in a closed market. Domestic energy costs will rise at the expense of U.S. consumers. It ultimately comes down to a domestic battle between natural gas producers and its consumers, which makes much more complicated to resolve than problems of technology or capital.
In a short period of three to five years, investment in American shale gas has clearly slowed as investors have realized that the three changes are unlikely to materialize in the near future. Yet, despite the protected domestic market, the American shale gas revolution has not been without its contributions to the rest of the world. It has broadened understanding of energy resources while bringing us new technology and innovation that turned shale gas into a valuable commodity. Humanity’s unceasing pursuit of innovation is the ultimate inexhaustible resource.
The Chinese shale gas industry is merely taking its first steps. Natural gas only represents a very small portion of China’s primary energy sources, and a natural gas market mechanism has far from taken shape. Whether to satisfy growing energy demand or to meet the pressing need to reduce emissions and protect our environment, increasing natural gas supply is the most feasible option. But shale gas in China requires a huge investment, be it for developing the domestic market, for building pipelines or simply for importing LNG. Under the current system, not only are there a limited number of investors providing insufficient funds, but other potential investors are restricted from entering the market. As a result, the scale of available investment is unable to meet the needs of the natural gas industry. What’s more it’s difficult to guarantee that any investment will be sustained into the future.
American oil companies primarily invested in shale gas in the United States. Chinese oil companies also primarily invested in shale gas in the United States. No wonder the United States can produce 130 billion cubic meters of shale gas in a year. It’s this simple: If the money doesn’t come in, the gas can’t come out. Although China and the United States are at wildly different stages in the development of the shale gas industry, they are both suffering from the same problem: inadequate investment going forward. Nonetheless, the American shale gas revolution has demonstrated that the invisible hand of the market is more effective than the visible hand of government in attracting large scale and sustained investment. China still has a long way to go.
The author is the lead researcher at CNOOC’s Energy Research Center
By Chen Weidong