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Chinese shale gas is no place for short-term investors

China's major state-controlled energy producers say they will surpass an ambitious government forecast for shale gas output in 2015. The projections of rapid expansion run counter to industry views that most of the growth will remain anchored in North America over the next few years because of much easier accessibility, lower costs and a big lead in technology and infrastructure.

The outlook for higher production is sure to add to pressures facing the global energy markets. Increased domestic supplies of gas will ultimately mean lower demand in China for expensive liquefied natural gas imports and will also squeeze oil exporters, which are likely to cut supply before prices. But that's the longer-term prognosis.

In the near term, China is destined to remain increasingly dependent on energy imports until it gets much farther down the road to greater economic exploitation of its vast shale reserves – the world's largest, estimated by Beijing officials at slightly more than 25 trillion cubic metres, nearly double the U.S. total (based on 2012 projections).

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PetroChina Co., China's largest oil and gas producer, has set a target for next year of 2.6 billion cubic metres through 28 new platforms, and expects the annual amount to reach 11 billion by the end of the decade.

China Petroleum & Chemical Corp. (Sinopec) has an even more aggressive goal next year of five billion cubic metres. And it has doubled its expected yield from Fuling, a major project in southwest China, to10 billion cubic metres by 2017.

The combined projections next year would exceed Beijing's target of 6.5 billion cubic metres, which its own resource experts warned would be difficult to achieve. China's output last year was a mere 200 million cubic metres. By contrast, the U.S. produced 266 billion in 2012. China's goal is to reach 100 billion by the end of the decade.

None of this implies less Chinese reliance on imported energy any time soon. Domestic demand for natural gas climbed nearly 14 per cent to 169 billion cubic metres last year. Imports accounted for 53 billion of that total, a 25-per-cent hike over the 2012 level, and will keep rising, as officials seek to reduce excessive dependence on coal-fired power.

As they move closer to commercial production, Chinese companies will be facing ever higher costs as they reach into areas where the stuff is harder to extract. Sinopec's Fuling project alone carries an estimated price tag of about $4-billion (U.S.). Analysts say the cash from the company's planned sale of a lucrative 30-per-cent stake in its chain of gasoline stations could be directed right into shale.

"The new capital from outside investors will be used for adjusting capital structure, further exploiting shale gas fields, investing in environment and safety, and upgrading quality of oil products," Sinopec chairman Fu Chengyu said last month.

The problem for both PetroChina and Sinopec is that, while Beijing has big ambitions to be a world leader in shale production, regardless of its economic feasibility under existing market and geological conditions, neither company is immune to the industry-wide cutbacks in capital spending. It makes the shale boom in China somewhat less than enticing for foreign investors.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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