In the next few weeks, top executives from the world’s leading oil companies will descend upon China. The reason? To take a stake in one of China’s as yet untapped resources. This summer China will hold its first licensing round for the production of shale gas – and it is looking for help.
Successful applicants will be expected to hydraulically fracture a minimum number of wells and you can bet the Chinese will be paying close attention. The nation has looked on with keen interest as the US has transformed its energy outlook through the production of shale gas. Now China wants to repeat the trick.
Why China desperately needs gas
The last time I walked around Beijing, I could not wait to get back to the air conditioning of my hotel. Out in the streets the air was choking with pollution – primarily the result of the city’s constant burning of coal.
This level of pollution is a problem and the Chinese government knows it. Its latest five-year plan for the country’s economy focuses on energy efficiency and clean fuel. It plans to reduce energy intensity (the amount of energy consumed per unit of GDP) by 16%. It has also finally fallen into line with global targets for CO2 emissions set out on the Copenhagen agreement.
For China, this means more nuclear and more renewable energy. But above all, it means more gas. By 2015 the plan is for China to derive 8.3% of its energy needs from gas. That’s up from 3.8% in 2008. Multiplied by the country’s rapid growth, this implies a trebling of annual gas consumption.
You should prepare for the ‘golden age of gas’
This switch away from coal towards gas features strongly in the International Energy Agency’s recent research paper, The Golden Age of Gas. This forecasts that not only China but the world will increasingly turn to gas.
The attractions are clear. It is relatively clean, it is easy to transport and it is ideally suited to the needs of the world’s rapidly increasing urban population. With nuclear under a cloud and governments that are anxious to avoid overdependence on oil and renewable sources only scratching the edges of energy supply, gas is the obvious answer. The question is – can we produce enough of it?
According to the IEA, the answer is yes. It calculates that recoverable gas from conventional sources can meet current rates of global consumption for 120 years. Taking into account gas that can be recovered from unconventional sources, we have enough for 250 years. It’s the ability to exploit unconventional sources that is really altering the picture.
While use of coal is expected to go into decline over the next 25 years and demand for oil is forecasted to lag GDP growth, gas is set to increase its share of global energy supply from 21% to 25%. That may not sound a lot, but combined with global growth this implies a 63% increase in gas demand by 2035. This should generate some fantastic investment stories in the coming years.
Where the biggest gas growth stories could happen
Gas is found the world over, but it is the US that has led the way in the exploitation of gas from ‘unconventional’ sources.
Unconventional gas is basically gas that does not flow freely to the surface. The definition includes tight gas trapped in impermeable rock; shale gas, where low permeability has until recently rendered it uneconomic; coalbed methane, where the gas is trapped in coal seams; and gas hydrates.
The last, a solid form of gas mixed with ice, is found in the far north or in deepwater offshore sediments. There is thought to be more gas locked in these hydrates that in all other sources put together, but any exploitation is decades away.
Coalbed methane gas projects are well established, and trials of underground coal gasification are under way. Another growth area is liquefied natural gas (LNG). Australia is developing some massive LNG projects, including the world’s first floating platform. Within a few years, it could become the second-largest global exporter after Qatar.
But it is production from shale gas that has really taken off, helped by horizontal drilling and ‘fracking’ – the fracturing of rock through high-powered injections of liquid, mainly water. This practice, which threatens to increase greenhouse gas emissions and could damage water supplies, has already been subject to ban or review in France, India, South Africa, Canada and parts of the US. But as yet, these concerns show no signs of derailing enthusiasm. In Poland, for instance, several shale gas projects are under way which could ease the country off its dependence on Russian gas.
So the golden age of gas promises plenty of investment opportunities, including some that have barely attracted investors’ attention. The IEA favours the prospects for gas-powered vehicles and it hints at one other intriguing application: small scale LNG liquefaction.
“One-half of the estimated 134bcm of gas flared in 2010… could produce some 0.7m barrels of additional liquid hydrocarbon fuel,’” the IEA says. So far as the latter is concerned, readers of Red Hot Penny Shares are already on the case.
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