China is raring to get going with a shale revolution of its own. In fact, the nation is willing to court the risk of earthquakes in order to access shale riches.
Bloomberg reports that Royal Dutch Shell Plc (NYSE: RDS-A) and China National Petroleum Corp. have begun drilling operations in Sichuan. Sichuan happens to be China’s most seismically-active region; in other words, it’s highly prone to earthquakes because the subterranean plates move around quite often.
“For the Sichuan basin, earthquakes are a problem for shale gas and shale oil production because of the tectonic conditions,” said Shu Jiang, a professor at the University of Utah’s Energy & Geoscience Institute in Salt Lake City. “The siting of the wells could cause some artificial earthquakes.”
Is this going to deter China? Probably not. After all, the nation allegedly contains shale gas reserves twice that of the U.S. And China has clearly observed events in the U.S. closely, following the shale boom, the resulting crash in energy prices, and the looming specter of American energy independence. All of that is surely very attractive to China, which is battling rapid industrialization and urban shift amidst a slowdown in manufacturing and the general economy.
In the U.S., shale could add about $690 billion to the GDP on a per-year basis and result in as many as 1.7 million new jobs by 2020, according to a McKinsey study. It’s clearly to China’s advantage to mimic these fantastic results as best as possible.
Just recently, after all, a series of shocking photographs depicting the density of smog in Beijing made the rounds of the Internet, drawing comparisons to Ridley Scott’s dystopian visions of the polluted city in Blade Runner.
However, China faces serious risks if it goes ahead with its fracking operations. As you know, fracking involves shooting pressurized water and chemicals at tremendous force underground in order to crack open rock and release gas trapped within. The wastewater is subsequently deposited in wells deep underground.
The practice has raised controversy in many quarters, with opponents underscoring repeatedly the risk for contamination and spill-out. Both in the U.S. and in China, fracking has been directly linked to minor earthquakes. The U.K. imposed a moratorium on fracking after the practice was linked to earthquakes. And Sichuan is widely noted as a place that contains some of the most active fault lines on the planet.
Southwestern China—including Sichuan—holds more than 40 percent of China’s estimated shale gas reserves. By 2015, the nation is aiming to get out some 6.5 billion cubic meters of shale gas, and it hopes to increase that to 100 billion cubic meters by 2020. Let me remind you that China produces zero cubic feet of gas as of this year. That’s ambitious no matter which way you look at it.
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Investing in Chinese Shale
Meanwhile, Shell isn’t nearly as concerned; the company will invest $1 billion into China’s emergent shale gas industry over 2013. Sichuan, however, is a historically-sensitive location. It was the site of a massive earthquake not that long ago—in 2008—which resulted in the loss of 70,000 lives.
On the other hand, if these fracking operations can be executed safely, it could mean a sharp rise in prosperity for China as a whole—new jobs, energy efficiencies, and of course massive inflows of revenues, royalties, and profits.
Yet concerns remain as to whether China’s water supply can even sustain the kind of usage demanded by fracking operations. After all, as RT notes, China only has 6 percent of the world’s freshwater supply and is prone to significant water shortages.
Adding to the woes, it seems many of the companies that had won blocks in the second shale gas auction China held not long ago have just barely begun their operations. At the heart of their problems appears to be a mix of lacking expertise, infrastructure, and funding.
Reuters reports that 16 prospectors had pledged to invest about $2 billion over the three years from late 2012, when the auction was held. Thus far, however, companies have successfully completed a seismic survey of just 385 miles out of the 19 blocks. No well has yet been drilled.
It’s probably worth noting that of the 16 domestic companies that received blocks, none actually has any oil and gas experience.
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