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Asia’s gas thirst sees region turn to unconventionals

A panel of experts discuss Asia’s quest to secure gas supplies and the significant obstacles ahead

The phenomenal growth in Asia’s gas demand could prove decisive in pushing the region towards large-scale development of its unconventional potential, a move which would radically alter the region’s supply dynamics – but only if a number of major hurdles can be overcome.

The need to secure gas supplies has topped the Asian energy agenda for some time, but gained urgency in the aftermath of the 2011 Fukushima Daiichi meltdown. Indeed, participants at Petroleum Economist roundtable, Asia: From gas consumer to gas producer, sponsored by GL Noble Denton, also heard that the unconventional sector has benefited from an unlikely source – the “Fukushima factor”.

Japanese liquefied natural gas (LNG) demand surged last year following the shut down of most of the country’s nuclear power-generation fleet, pushing up spot-market prices across Asia. And Asian gas demand is likely to increase in the long-term, with concerns surrounding the safety of nuclear energy leading to construction of more gas-fired power generation instead. Therefore, Asian countries are likely to increase investments in domestic gas production to secure supply, including unconventional sources.

The need to diversify and secure supply becomes even more acute in the face of the region’s growing demand, which, according to International Energy Agency (IEA) data, is expected to increase by 17% by 2017, rising to 50% by 2035. The IEA expects gas demand in OECD Asia alone to increase from 195 billion cubic metres (cm) to 241bn cm in 2010-17.

China’s demand

Nowhere is this need to boost production to meet growing domestic demand more sharply in relief than in China. At present, the country is one of the world’s major gas consumers, and, with demand increasing by an average of 13% per annum, the country is expected to double its consumption from 130bn cubic metres (cm) in 2011 to 273bn cm in 2017, according to the IEA.

Gavin Thompson, head of gas at Wood Mackenzie, a consultancy, told roundtable participants that while China has significant shale-gas potential – official Chinese data pegs the country’s technically recoverable shale-gas at 25.1 trillion cm, as well as a further 12 trillion cm of tight gas – Wood Mackenzie believed growth in the sector would be slower than anticipated.

Thompson said that while the impetus is there for China to develop its unconventionals sector, the challenges to be negotiated mean that domestically produced shale gas will not make a major impact on the country’s supply mix in the short- to medium-term. However, he added that while the development may take longer than some expect, shale gas will prove a major boost to the country’s supply.

Indeed, Wood Mackenzie believes China could be producing as much as 150bn cm by 2030, with a large proportion of that output coming from shale-gas reserves in the Sichuan and Tarim basins.

While the Chinese authorities have moved to encourage inward investment in the country’s unconventionals sector, Thompson said a degree of uncertainty over whether the country’s state-run companies would provide the investment needed for development had given potential entrants pause for thought. Panel participants were agreed that, given the substantial, long-term capital commitments needed to push ahead with development, a clear fiscal framework is vital to attract foreign cash.

Regulatory concerns, too, need to be addressed. Unconventionals development will place greater stress on local resources; water, in particular. Almost half of China’s shale plays are situated in drought-prone regions, and finding a balance between the needs of local communities with those of industry will be vital. Land access also needs to be addressed. Sichuan province, which has some of the most prospective shale acreage in China, also has one of the highest population densities in the country.

Richard Bailey, GL Noble Denton’s executive vice president for Asia Pacific, said that China’s lack of infrastructure, particularly an extensive pipeline network, could hinder development. However, he pointed to the results of a series of snapshot polls carried out by GL Noble Denton on the WGC2012 conference floor, which indicated a high degree of confidence that China can successfully negotiate these challenges to emerge as the world’s largest shale-gas producer by 2030.

Ate Visser, Shell’s vice president gas, Asia, in the supermajor’s upstream international unit, agreed. He pointed out though that China is not alone in needing to expand its energy supply infrastructure. Visser said that India too needs to invest heavily, adding that of the $38 trillion the IEA estimates will need to be spent on infrastructure investment until 2035, $11 trillion will be spent in Asia, and most of that will be in both China and India. Visser added that the funding needed equates to a spend of roughly $9bn every week for the next two decades.

Visser also said he believed China could learn from the Gujarat state government, in India, which poured significant investment into building and developing intrastate gas pipelines.

Other, more fundamental issues remain for China, however. Peter Cockroft, chairman of Australian-listed coal-bed methane player Blue Energy, said he believed that full-scale development would lag until industry has developed technologies suitable for China’s complex geology. He cautioned that Chinese plays are more structurally complex than those in North America, and, at present, are little understood. On top of this, China’s shale formations are deeper – most of North America’s producing shale deposits lie at depths of less than 3,000 metres, while Chinese shales average between 3,000-5,000 metres subsurface. It is likely, he said, that the hydraulic fracturing techniques used to unlock the Marcellus or Haynesville plays, in the US, would not be easily adapted for use in China’s shales.

Cockroft did not believe this would prove insurmountable, however, and added his voice to Thompson’s belief that coal-bed methane and coal-to-gas production, coupled with pipeline and LNG volumes, would bridge the supply gap until the unconventionals sector ramps up fully.

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