Shale gas development in China could displace liquefied natural gas (LNG) imports to China and create pipeline deliveries of gas to South Korea, roiling Asian natural gas markets, according to a report on "The Rise Of China And Its Energy Implications" released by the James A. Baker III Institute for Public Policy on Dec. 2.
"Higher shale gas production displaces LNG and has by far the most impact on LNG," said Ken Medlock III, the James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics at the James A. Baker III Institute for Public Policy at Rice University. "We see gas demand moving higher; and you have a reciprocating impact. When you have more available domestic supply, you see lower prices and get higher demand in China."
In running this case, the researchers saw something that was not expected, he continued. "You see pipeline development into the Korean Peninsula, and you see exports of up to 1.0 billion cubic feet per day into South Korea. This is a very interesting development because you have more far-reaching impacts on the LNG market because South Korea is a very large LNG importer."
The study – "Quantitative Analysis Of Scenarios For Chinese Domestic Unconventional Natural Gas Resources And Their Role In Global LNG Markets" – utilized the Rice World Gas Trade Model to examine the market implications and geopolitical consequences of potentially important supply and demand side developments in China.
The results were based on three scenarios. The reference case posits a scenario where all known global shale gas resources can be developed given prevailing commercial technologies. China's recoverable shale gas resources would equate to 75 trillion cubic feet (Tcf).
In the high-China-shale case, the recoverable shale gas resource in China would be 600 Tcf.
Finally, the low-China-demand case posits a much slower growth rate for the Chinese economy. The average annual growth rate would be 2.5%, which is half the GDP growth rate of 5.1% in the reference case.
"We find is that you have robust shale gas development that is every bit as game changing regarding the projected future as what we’ve seen in North America. I think that’s a pretty important point because you're talking about a very large market," Medlock stated.
"If you have a lot of domestic resources, that changes the LNG picture dramatically.
"China's shale gas development could stand if it is very robust and could change the picture, not just for China, but for other countries as well," he emphasized.
In the low-demand case, the projected demand for China does not materialize and that pushes a lot of LNG back out onto the water. LNG imports are substantially lower. "You see a substantial impact borne by the LNG market that is surprising," he noted.
"In the high-China-shale case, what is interesting here is that by displacement, what you end up doing is pushing LNG to the U.S. if the LNG market in China doesn't materialize. And, that was a shocking impact because everyone here is talking about exports," Medlock said.
"Effectively, what it is doing is lowering the price on the water, changing the marginal cost of supplies in a global LNG market and creating some very interesting impacts. What happens when you have a lot of shale gas in China basically is that you shut Iran down. You really put the clamps on Venezuela. There are lots of far-reaching implications for shale. Not only are there economic impacts, but there are geopolitical impacts," he explained.
"In the low-China-demand case, the difference here is that you see a bigger impact on Australian imports than you do in the high-China-shale case.
"The critical point that came out of these scenarios is that the brunt of the impact of robust growth and development of domestic resources or lower-than-expected growth will be felt in the LNG market," he continued.
"A very key point is that a lot hinges on China, and I really think that falls out of this. When we've seen what happened in North America, we see that really shifted everybody's focus there. Now, they are focused more heavily on market opportunities in Asia. If something happens to change the game in Asia, where's the next big market?" he asked.
However, there is a tremendous amount of uncertainty outside of North America. For example, in China, there's not a lot of data to back up the resource estimates.
"We looked at published data on geophysical characteristics of shales and created mapping for that data into ultimately recoverable resources for average type wells drilled in different shales around the world. Once we had the mapping, we could apply geophysical characteristics for shales elsewhere where no wells have been drilled but there is a little bit of geophysical data.
"We can confirm what likely might be what the 'D' curve looks like, which gives you an average type well performance and thus an average type well cost," he stated.
Water is also a major issue in China, he pointed out. There are several shale basins in areas where China has a high degree of water stress.
"Water conflicts are not new to China. There have been water conflicts in China sometimes on a regional basis and sometimes these have been violent," Medlock continued.
"China's standard MO (method of operation) is an engineering approach. Let's build massive amounts of infrastructure to move water from one area to another. They have yet to move into a conservation approach," he added. The country needs to change to allocating water rights instead of the engineering approach.
Gas markets in the rest of the world are not like the North American structure, which is very conducive to entrepreneurs. If a company has capital, the wherewithal and access to leases, it can drill a well, develop the field and tie into a market. All the company has to do is negotiate capacity rights to move natural gas to markets.
"Outside North America, that’s generally not the case. The closest is probably Australia, and Europe is moving in that direction. Asia is not even close. A lot of development work has to occur before massive development of shale gas can occur," he emphasized.
