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Optimism or Reality: US-China Cooperation on Shale Gas

Optimism or Reality: US-China Cooperation on Shale Gas

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Why the Failure of Overambitious Production Targets Could be Positive for the Future of US-China Shale Gas Cooperation

This is a Guest Post from Frauke Heidemann and Patrick Renz, CSIS Pacific Forum WSD-Handa Fellows who recently finished their Master of International Relations at Tsinghua University in Beijing. This is the final post of a series on US-China strategic energy relations. Earlier posts in this series looked at the Risks and Opportunities of Chinese Direct Investment in U.S. Unconventional Oil and Gas, The Four Key Challenges to Increasing U.S. Private Investment in Chinese Shale Gas, and the Opportunities for U.S.-China Shale Gas Cooperation.  

 

Chinese investment in unconventional fossil fuels is aimed at China’s goal of restricting coal use and increasing domestic natural gas production. It also presents an opportunity for increasingly difficult Sino-US bilateral relations. Despite a continuously strained strategic relationship, our analysis has shown that both on a governmental and a business level, this investment opened opportunities for the two countries. The special focus of our analysis has thereby been on shale gas as this area has been the priority of the Chinese government’s attention, even more so than coalbed methane or tight oil.

News about shale gas production has been somewhat followed in the general direction of US-China relations. While earlier this year there was euphoria about current shale gas production rates and the surpassing of the 2015 targets, just last month this was followed by cutting the 2020 shale gas targets by more than half. Even though experts seem to agree that such a target is much more realistic, it is striking how optimistic many analysts were about the old target just a couple of months ago. As much as the domestic shale gas boom surprised many in the US, it is currently almost impossible to assess the future potential of China’s domestic shale gas.

 

Opportunities for US-China Cooperation on Energy Security

China DrillingYet, all this does not lower the significance of further increased cooperation efforts on unconventional fossil fuel and especially shale gas development between the US and China. Energy security is of strategic importance for China and plays a major role in ongoing territorial disputes, increasing the value of an exchange or platform between both countries within said field. The two governments have the chance to discuss the necessary regulatory framework and support R&D efforts, whereas businesses find the chance to cooperate and invest.

As Chinese companies invest in the US shale gas sector, we see the many new opportunities presenting themselves for them. In times of growing unrest in the Middle East and ongoing crises in Africa, every potential new supplier or declining import helps to ease concerns of China’s leadership about energy security. However, uncertainty about regulatory restrictions, growing public pressure and long-term economic sustainability are worrying the Chinese side. Ultimately, and despite hopes and ambitious dreams, investments in the US will do nothing more than add another country to China’s global energy diversification strategy. Even though this potentially narrows the scope of cooperation, the current window of opportunity should be exploited.

 

How to Finance Chinese Shale Exploration

With regard to China’s domestic shale gas production, there are frequently highlighted challenges regarding the geology and existing infrastructure, presenting both risks and opportunities for governmental as well as business level Sino-US cooperation. Most recent reports by industry analysts are however no longer focusing on those challenges, but on the key to address them: sufficient finances. The demand of capital to continue a successful shale gas story is enormous. While it will be a challenge to get investors that are willing to take the risks associated with shale gas production, this also presents a great opportunity to use shale gas production as a test for increased private investment in and further reforms of the energy sector. The main motivation for this opening up to private investment within the energy sector is thereby not identified as a will to reform, but the need to address gigantic costs when replicating the US shale gas boom.

Estimates are that the costs of drilling a shale gas well in China are around 10 million USD and before it is possible to better assess the Chinese potential about 1000 wells need to be drilled. A back of the envelope calculation, therefore, is that 10 billion USD in investment is needed. As mentioned earlier, both Sinopec and CNCP have announced that private investment will be sought. Apart from government reform plans for its powerful energy majors but due to the high cost of producing shale gas – state owned giant or not – the three National Oil Companies (NOCs) won’t be able to stem the financial burden alone. Either way, having private and also outside-sector SOE investments in China’s oil and gas production is an important factor in opening up the energy sector, also increased international cooperation. Given that Chinese investors oftentimes lack or are just eager to improve the expertise required in following through with their projects, the privatization move might enable even more cooperation with foreign companies. China experienced US based supplier companies such as Schlumberger, Halliburton and Baker Hughes that can bring in both technology and expertise are already heavily increasing their engagement with private suppliers in China’s oil and gas sector.

While some argue that the new shale gas production goal of 30 billion cubic meters (bcm) by 2020 instead of the previously envisioned 60-100 bcm will put the sector’s development on a more sustainable footing, it is really too early to tell which way the Chinese shale gas production takes. Depending on how successful it will be and whether this success will endure, those companies will be interested in offering their services, if there are investors that can provide much needed financing.

 

Conclusion: An Important Opportunity for Cooperation

To conclude, shale gas is a unique opportunity for energy cooperation between the US and China with implications beyond this narrow field. We have elaborated on the potential for US-China relations, on investments in the US and in China and have given an outlook with regards to the financing problems. The largest potential for future cooperation, even despite the more pessimistic production targets, continues to be in China. By increasingly opening up to domestic private investments, the Chinese government is pushing for shale gas production that might enable it to help reduce dependence on coal use in light of public dissatisfaction about air pollution and potentially further enhance opportunities for foreign investors. The US is on the right path in offering its cooperation, not only for the mutual goal of advancing clean energy, but also to combine platforms for less sensitive shale gas production with broader talks about critical energy security questions as a means to achieve positive results even if bilateral relations might be strained with regards to other issues.

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