US shale gas achievements offer valuable learning curve for fledgling industry in China

As China gears up for its second auction of shale gas acreage - expected to be announced any day now - it is trying to make good on an ambitious promise made earlier this year to produce 6.5 billion cubic meters of shale gas per year by 2015, up from its current production of, well, about zero.

What does shale gas mean for China? Simply put, shale gas development represents an opportunity for China to trim its reliance on imports of natural gas, which have been steadily increasing in recent years. It is also a chance to tackle the country's enormous pollution problem by converting a large number of power plants that run on coal today to cleaner-burning natural gas tomorrow.

To see the transformative impact of shale gas, China need look no further than its friendly rival across the globe - the United States - where, in less than a decade, shale gas has begun to revolutionize the power and industrial sectors.

In addition to hastening the phase-out of polluting coal-fired power plants, the advent of shale gas in the US has caused an unprecedented drop in the domestic price of gas, which now hovers at about $2 to $3 per mmbtu (million British Thermal Units), down from $15 less than 10 years ago. Cheap gas promises to lure petrochemical plants, aluminum smelters and other major industrial users of gas back to the US.

Also, because gas producers can fetch much higher prices outside the US, particularly in Europe and Asia, the US is now turning to natural gas export. While export is probably not in the cards for energy-hungry China anytime soon, abundant and cheap (particularly in comparison to imported liquefied natural gas) natural gas could presumably give Chinese industry a nice boost.

But the US has benefited from two advantages that are lacking in China today: homegrown shale gas production expertise and government leadership fully committed to developing shale gas in the most environmentally responsible way.

On the first point, small US companies later acquired by larger companies such as Anadarko Petroleum Corp and Devon Energy pioneered the "fracking" method needed to develop shale gas reserves; such technology is now successfully deployed by scores of companies producing gas from shale in the US.

As of today, no Chinese company can claim to have developed the requisite in-house expertise. Chinese State-owned companies such as CNOOC and Sinopec may gain exposure to shale gas development technologies through recent acquisitions of stakes in US shale gas developers such as Chesapeake Energy, but in so doing they need to be careful not to violate any intellectual property protections of, or confidentiality obligations to, their US partners.

Fortunately, it seems that the Chinese government recognizes that if you want big production, you bring in the big boys. When announcing its production goals back in March, the government urged Chinese companies to work with foreign companies to explore and produce unconventional natural gas, namely shale gas.

Turning to the second point, in the US, the government has issued regulations on shale gas emissions and is currently working on rules to regulate wastewater discharge from shale gas extraction.

China, however, lags behind the US and other industrialized nations when it comes to environmental protection at all levels and of all industries.

In a positive sign, it has been reported that Chinese leaders are currently working on a major environmental protection bill for the oil and gas industry, but worryingly, this bill does not cover shale gas extraction.

China has been blessed with a game-changing opportunity to satisfy, in part, and, one day, perhaps in whole, the demand for power-generating fuel that is central to its economic growth. In order to harness this resource to greatest benefit, China needs to take a page not only from the US technology playbook, but also from its environmental one.

The author is an adjunct professor of oil and gas law at the Georgetown University Law Center.

(China Daily 08/03/2012 page7)