Russian Gas Essential to Chinese Expansion

This article originally appeared at Oil Price


Ever since 2010, when the State Dept. first introduced fracking as a panacea for all energy problems, the technology has transformed the US energy sector, but it has remained more of a psychological phenomenon in Asia. The fracking game is over in both China and continental Europe, as a result of the recent plunge in oil prices.

The majority of the existing agreements within the Chinese market have made little progress beyond the preliminary stage of studying the oil and gas fields. Jim O’Neill’s classic advice, “never… attempt to forecast the price of oil,” has become a self-fulfilling prophecy for shale-oil projects outside the United States (here’s an insider tip: if you hear someone claim to “sense the trend” on the current oil market, feel free to kick that liar in the name of science – at least verbally). Suffice it to say that in the golden days of the fracking bubble, even the bestselling author and pundit Daniel Yergin fell into the trap of trying to forecast the Chinese shale bonanza.

Three years ago, with the help of major global energy companies, Chinese state corporations invested about $7 billion in 400 wells across China, including 130 wells drilled horizontally. In hindsight, China’s attempt to import fracking technology “as is” from the United States to Sichuan Province was neither economically feasible nor environmentally friendly. At first, the production profiles for shale deposits in Sichuan were as high as 60 billion cm/year. But in August 2014, China halved the quantum of shale gas it expects to produce by 2020, after early exploration efforts to unlock this unconventional fuel resulted in an explosion at a shale-gas drilling rig that reportedly killed eight workers in the small town of Jiaoshi.

Currently, wells in Sichuan cost about $13 million – much more than even the most expensive wells in North Dakota – and the gas-recovery rate in those Sichuan wells is below 20%. According to Bloomberg’s forecast, in 2015, shale will account for up to 3% of the country’s total gas consumption that year, which is not bad considering the immense scale of the Chinese energy market in real terms. However, shale output will not be able to satisfy the growing demand for natural gas in China, even assuming a quite modest 6.5% increase in nominal GDP. According to the Economist Intelligence Unit industry report on energy (2014), total energy consumption in China will reach 3,550.2 million tons of oil equivalent by 2020. In short, there’s houseroom for everybody in the Chinese market.

China needs Russia’s natural gas and remains a crucial market for Russia to enter, and now Russia’s natural gas exports to China will expand thanks to the Power of Siberia pipeline. This agreement is a gateway to bilateral energy cooperation between these two BRICS leaders. It is a win-win deal that was reached after a decade of difficult negotiations, and is not merely a “response” to sanctions. It was never intended as any sort of retaliatory move. The energy partnership between Russia and China began long before the European Union helped to destabilize Ukraine while embracing the suicidal policy of cutting itself off from Eurasian resources through legislative barriers like the Third Energy Package. In 2014 Russia’s biggest energy company, Gazprom, was finally able to break through to the largest consumer in Asia because of other success stories, i.e., the ESPO pipeline and the adoption of better practices throughout the Russian energy industry. “We have signed agreements to increase crude oil supplies, created joint ventures for oil exploration and production in Russia, and started the construction of a large joint refinery in China. Chinese companies have joined gas projects on the Russian Arctic and Sakhalin shelf,” summarizedDeputy Foreign Minister Igor Morgulov in his interview with the Xinhua news agency on Jan. 13, 2015.

Long-term natural-gas contracts may take years to iron out and conclude. However, at present they are far more reliable than unconventional gas or green alternatives. Once finalized, bilateral long-term agreements remain in full force for decades, despite inevitable periods of high volatility in energy prices.

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