While China Waits on Shale Gas, Soaring Energy Demands Create Regional TensionsOctober 15, 2014 By Qinnan Zhou
China’s energy investments are on the move, touching nearly every region of the globe from coal and liquefied natural gas imports from Australia to a recent natural gas agreement with Russia and expanded oil drilling in the South China Sea. [Video Below]
“One point three billion [people] times everything is a lot”
China’s growing demand for reliable energy sources to power its fast-growing economy will not only have major impacts on the global oil and gas markets but may trigger geopolitical tensions in Asia, said panelists at the Wilson Center on September 17. And a major push for shale gas – China has the largest reserves in the world – is not moving fast enough to diffuse such competition.
Increasing Regional Demand
“One point three billion [people] times everything is a lot,” said Robert Daly, the director of the Kissinger Institute on China and the United States at the Wilson Center. “China needs fuel.”
China is the world’s largest energy consumer and the second largest oil purchaser after the United States. The International Energy Agency predicts that China’s oil imports in 2030 could increase up to 1.6 times from 2011 levels.
The country’s rising middle class and rapid economic growth are placing tremendous pressure on its existing energy supplies. Meanwhile, public concerns over air pollution and other environmental issues are pushing the government to move away from dependency on coal, which currently supplies 70 percent of the country’s electricity.
Worse yet, India and other emerging countries in South and Southeast Asia are also experiencing strong growth in domestic energy demand, and will no longer be able to serve as major oil and liquefied natural gas suppliers to Northeast Asia. Thus, traditional importers such as China, South Korea, and Japan may need to look outside the Asia Pacific region to guarantee reliable and diverse natural gas resources.
South China Sea Tensions and Shifting Alliances
“Energy competition can multiply territorial disputes,” said Mikkal E. Herberg, senior lecturer at the University of California, San Diego, and research director of the Energy Security Program at the National Bureau of Asian Research.
“Energy competition can multiply territorial disputes”
China, Vietnam, Malaysia, Brunei, and the Philippines are using drilling blocks in the South China Sea as “markers of their strategic plan,” said Herberg. And other neighbors, like Japan, have a vital interest in maintaining unhindered access to sea lanes through the area, which are crucial trading routes.
The competition for energy could potentially shift traditional alliances as well. The mineral and energy trade are drawing China and Australia, a historical U.S. ally, closer to one another, said Herberg, and there is a heated national debate in Australia on how the country should balance its relationship between the two giants.
Global Buying Power
At the energy negotiating table, China sits in a position of power. China is one of a few perceived energy growth markets, as oil demand from OECD countries is expected to plateau and forecasts indicate oil demand and natural gas from the United States will fall due to an abundance of domestic production.
Amy Myers Jaffe, executive director of Energy and Sustainability at the University of California, Davis, laid out two negotiating strategies that China uses to obtain the best energy prices. First, it plays offers from competitors, such as Russia and Australia, off each other to drive down the price. Second, it offers concessional loans to countries like Venezuela, Russia, and African partners under terms in which China essentially gets “oil for free” in exchange for development assistance, she said.
China’s primacy will even impact U.S. energy prices. The newly inked Russia-China gas deal, which raised European fears that Moscow could cut off gas for policy support, is fueling an export push by the United States. In turn, increased natural gas exports, as a 2012 U.S. Energy Information Administration report predicted, could lead to higher domestic prices.
“Energy pricing is globally driven,” said Jan H. Kalicki, a Wilson Center public policy scholar and co-editor of Energy and Security: Strategies for a World in Transition. “So the U.S. market will feel the impact no matter how much we produce here at home.”
A Revolution in Waiting?
Instead of increasingly relying on oil and gas imports, though, China has an alternative: dig deeper on its own land and find ways to tap the world’s largest shale gas reserves. China is estimated to have twice the size of the U.S. shale gas reserves, but commercial development is still in the embryonic stages.
“The U.S. market will feel the impact no matter how much we produce here at home”
One way to bring China’s shale gas online faster is through more U.S.-China cooperation. In just a decade, the United States has transitioned from a major energy importer to an exporter, thanks to shale gas. The expertise earned during this transition is invaluable.
As vice president of ConocoPhillips Corporation, the largest independent U.S. oil and gas company operating in China, J. William Ichord said, such cooperation could be a way to ease geopolitical tensions.
The success of U.S. shale gas production has been due to favorable geological conditions, flexibility in private sector operations, an extensive pipeline infrastructure, a trained workforce, and abundant water resources, Ichord said.
Technological innovation has also played a significant role. “Hydraulic fracturing has been done for 40 to 50 years, but the combination of horizontal drilling and hydraulic fracturing is a more recent phenomena beginning in the early 2000s,” he said.
“The Chinese government…is trying to make a big push to get Chinese shale off the ground,” said Jaffe. “My opinion is…it’s one of the things they will eventually be successful at.”
However, there are still daunting challenges. Beyond the technical feats, key ingredients to the successful commercialization of China’s shale gas are the development of a production sharing contract system, more transparent market pricing, and equal access to existing technical data, said Ichord. Lack of water is also a major obstacle, given the heavy requirements of current drilling techniques.
Some of these barriers can be addressed through better U.S.-China cooperation. But others require better natural resource management and perhaps changes to the country’s entire energy infrastructure.
Sources: Circle of Blue, Forbes, The Hill, International Energy Agency, MIT Technology Review, U.S. Energy Information Administration, The Wall Street Journal.
Photo Credit: A coal barge by the Three Gorges Dam, courtesy of flickr user foxxyz.