REMINDER: America Is Not The Biggest Winner In The Shale Gas Revolution


Americans are thrilled that the shale gas revolution could make their country the world’s top energy producer by 2013. But in the long term there’s another country that benefits even more.

China has 25.05 trillion cubic meters of recoverable shale gas resources, compared to only 12-13 trillion cubic meters in the U.S.

Barclays’ Scott Darling says China could follow the U.S. model in developing its resources:

China continues to outline its non-conventional gas targets. The government has the set 6.5bcm/year by 2015 and 60-100bcm/year for shale gas production by the end of the decade. Although we believe that these targets may seem ambitious, the pace of progress in acquiring non-conventional asset for technology/process knowledge and domestic developments is starting to gather pace. China is committed to supporting development with numerous overseas joint ventures (JVs) and acquisitions for exploratory technology and production experience…

We have previously highlighted the challenges facing China’s non-conventional gas development, namely export pipeline availability to demand centres and water availability. However, while these factors are important, we believe the key issues in determining the pace of shale gas developments in China relate to development economics, application of technology and project management rather than geology and resource quality. For most of the shale gas deposits in China, the technology is in place (ie the US and most parts of China are based on the same type of marine shales). Shale gas is positioned at the high end of the hydrocarbon cost curve, and first projects are likely to have high capital costs where project cash break even requires about US$7-9/mbtu for example in Sichuan province according to Wood Mackenzie. We would expect the government to provide some subsidy or tax breaks to support shale gas development similar to coal bed methane. However, if these issues can be overcome with clarity over subsidy and tax terms, the main issue is project management to fine-tune the extraction process. We would expect the international oil companies to manage projects assuming there is sufficient economic incentive to invest. We see Shell, Chevron, BP and ExxonMobil well positioned to work with Chinese energy companies having been in the country for many years or having overseas JV projects.

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