Chinese Labourers Work At Lunnan Oilfield In Xinjiang

China quietly cut its 2020 goals for shale gas, a goal that was so ambitious that few took the number seriously.

The goal – to ramp up from zero commercial production of shale gas to 60-80 billion cubic meters by 2020 – was met with skepticism both inside and outside China when first announced. Now, the country is back stepping a bit, cutting that goal to 30 billion cubic meters by the end of the decade and combining it with coal bed methane (CBM). While natural gas output is growing at a fast clip in China (production in the first half of 2014 was up 7.5% from a year earlier), China produced a total of 116 billion cubic meters of natural gas last year, from all forms of extraction. Notably, the announcement came via a statement by the head of China’s National Energy Administration (NEA) Wu Xinxiong on an industry website instead of an official statement on the NEA’s own site.

But the country needs the extra natural gas. While China may not be a leader on climate change, the government is finally taking air pollution seriously. Two weeks ago the city of Beijing announced coal-fired power plants would be phased out by the end of the decade, meaning one-quarter of the city’s power will need to be sourced elsewhere. Whether this is a scheme to move pollution outside of the city (many within the country have been calling for power plants to be built in remote locations and connected to demand centers with high-voltage wires) or a serious commitment to cutting coal use remains an open question. In the second scenario, natural gas appears to be the most likely replacement for electricity production. Already, the country sees shortages of natural gas supplies during the winter when homes and businesses rely on the fuel for heating.

Unconventional Miss

This isn’t the first time China’s leaders overestimated their state-run companies’ abilities. Coal bed methane (CBM) targets have been repeatedly missed. And while the shale gas revolution in the United States drove down natural gas prices, in China, accessing shale reserves remains more expensive than conventional reserves. Experts inside China’s national oil companies privately say they are more interested in developing conventional reserves than working on shale gas.

Part of the reason China is likely to miss its own targets is due to the learning curve; China must import both knowledge and equipment for hydraulic fracturing (the most widely used process to get shale gas out of the ground). But partly it’s due to geography. China’s shale gas resources are primarily located in remote regions with limited water supplies and far from demand centers (see earlier analysis on the topic).

An Unhappy Compromise

While Beijing is adamant about growing domestic sources of natural gas, admitting it can’t meet its own targets might be a signal that the country plans to up its reliance on imported LNG (already the country is building up its network of international pipelines, bringing in piped gas from the west, north and south).  Experts say demand for natural gas almost always exceeds supply and that the country can absorb whatever it can produce or import.

Cutting unconventional targets (even if they were unrealistic to begin with) means finding the gas elsewhere. By 2030, Beijing planned for up to one-third of its domestic production to come from unconventional sources. Importing more LNG is the strategy the country took after it missed CBM targets, according to Poten Partners, an energy advisor.

China typically takes between 1.8-2.3 billion cubic meters of LNG per month, except in the winter when that spikes above 3 BCM. And if the country gets serious about cutting (or even limiting growth of coal use), the admission it can’t reach its own targets could be good news for regional LNG suppliers.

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