Boom In China Shale Gas?

The role of natural gas (NYSE: UNG) in China's electricity system is a little known, yet highly significant piece of China's energy future (NYSE: CHIE).  Through 2012, natural gas has been largely absent from China's electricity generation mix, which has challenged the integration of wind (NYSE: FAN) and solar (NYSE: FAN) power and has left coal (NYSE :KOL) as the principal fossil fuel.  However, recent studies and investments in shale gas hydraulic fracturing, have given the Chinese (NYSE: FXI) central government hope that new technologies could unleash huge reserves of shale gas (i.e., non-conventional gas that is trapped in fine-grained sedimentary rocks).  A large expansion of China's natural gas production would drive down China's reliance on coal and facilitate the integration of renewable power sources (NYSE: GEX).

Natural gas (NYSE: UNG) currently accounts for less than 2 percent of China's electricity output, but the Chinese central government aims to push that proportion to 10 percent by the end of the decade.  China, now the largest electricity-consuming country in the world, currently accounts for only 3 percent of global conventional natural gas production and 1 percent of reserves.  By contrast, the US accounts for 20 percent of production and 4 percent of reserves.  But new studies on China's shale gas reserves suggest that China has 50 percent more natural gas than the US, and, if successfully extracted, these new reserves could provide a critical source of flexible electricity generation for China.

Natural gas (NYSE: UNG) plants are considered flexible because they are efficient at cycling; that is, they can quickly ramp up and down output to meet peak electricity demand and to accommodate for other demand and supply fluctuations.  For example, if a wind farm suddenly begins to generate electricity, natural gas plants can quickly respond by ramping down their output to maintain stable supply across the whole system.  When the wind dies down and the farm ceases to produce electricity, the natural gas plants can then ramp up output to make up for the loss of wind power.

In the US, natural gas plants do most of the cycling necessary to accommodate for intermittent power sources, such as wind (NYSE: FAN) and solar (NYSE: TAN).  By contrast, in regions of China without hydropower resources, coal-fired power plants perform the cycling, which significantly reduces the efficiency of those plants.  This reduced efficiency of coal-fired generation has significant implications for the environmental impact of wind power, as the integration of wind power, and the accommodation for its intermittency, make the rest of China‘s electricity generation pollute even more.  A coal-fired power plant with reduced efficiency must burn more coal (NYSE: KOL) and emit more pollution to produce the same amount of electricity as before.  Furthermore, China's coal-fired power plants, which were built to operate at full capacity, undergo accelerated wear and tear from the sudden changes in output.

To diversify away from coal, Chinese firms have made significant investments in shale gas projects in the US and Canada over the past two years, as they have sought experience and technology to tap into China's shale gas resources.  In 2010 and 2011, the China National Offshore Oil Corporation (CNOOC) bought 33 percent stakes in two shale gas projects run by Chesapeake Energy, a US energy firm.  Sarah Forbes, a shale gas expert at the World Resources Institute, describes the situation: “the U.S. shale gas industry benefits by receiving the capital it needs to continue operating and the Chinese companies profit in dollars and in knowledge on shale gas technology and operational management of shale gas.”  Even though Chinese shale gas production is expected to reach considerable levels by 2015 and 2020, perhaps enough to reduce imports from Russia and Middle Eastern countries, Forbes predicts that China will still have to rely on some natural gas imports from the Myanmar and Kazakhstan pipelines.

Given China's (NYSE: FXI) investments in North American shale gas projects and the government's plans to drill 990 shale gas horizontal wells in China by 2015, the prospect of a massive expansion of natural gas in China is becoming a reality.  A build out of natural gas plants, which emit half the amount of CO₂ that coal-fired power plants emit, would reduce China's reliance on coal and facilitate the integration of renewable energy (NYSE: GEX).  The flexible generation afforded by natural gas plants—coupled with China's investments in smart grid technology and energy storage—will reduce China's dependence on coal and make its electricity system more resilient, offering huge benefits for China's energy security and the environment.

Ryan Landon Swanson is an associate writer for Wall Street Sector Selector. His chief research focus is on the political economy of China's energy sector, but he also enjoys writing on the political economy of Latin America. He fluently speaks, reads, and writes Spanish and Mandarin Chinese. Ryan has substantial experience living, studying, and working in both China and Argentina. He earned a B.A. from the University of California, Berkeley in Interdisciplinary Studies with a focus on international relations and energy.

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