Australia tips China as shale gas hope

China may boast the world’s largest potential reserves of shale gas but is likely to lose to Australia in the race to be second behind the US in bringing significant production on line.

While it’s clear that the US has gained, and will continue to enjoy, first- mover advantage, it’s also likely that the next shale gas producer stands to reap substantial benefits.

For China, boosting domestic natural gas output would reduce dependency on expensive imports in the form of liquefied natural gas or pipelines from Russia and central Asia. For Australia, developing significant shale output could underpin a new round of Liquefied Natural Gas (LNG) projects, either at existing plants or greenfield sites, that would give the nation an unassailable global lead in the market for the super-chilled fuel.

But to be clear, both countries’ shale gas plans are in their infancy and face significant challenges that have largely been overcome already in the US.

Australia has several advantages over China when it comes to developing shale gas reserves, despite its potential resource, estimated at about 437tn cubic feet by the Energy Information Administration, being about 40%of China’s 1,115tn cubic feet. Chief among them is that much of the shale reserves are located in remote basins, away from population centres.

Even though the reserves are in remote areas, there is existing infrastructure available as some of these areas, such as the central Australian Cooper Basin, have long histories of conventional gas and oil production. This gives shale gas output the ability to flow from the centre of the country to the east coast, where it could be fed into existing, or expanded, LNG plants.

Three LNG plants based on coal-seam gas are under construction in Queensland state, but a fourth may not proceed because of concern over adequate gas reserves and the increasing difficulty of winning community support for coal-seam wells on productive farmland.

Santos, Australia’s No 2 energy firm, has started shale output on a commercial scale and plans to feed the gas into an LNG plant it is building in partnership with Malaysia’s Petronas.

Australia’s other significant advantage over China is that it is an easy place for global majors to do business.

While there is red and green tape, higher labour costs and taxes, there is also legal certainty for long-term investments and a tradition of foreign investment in the petroleum sector.

This can be seen by the increasing involvement of oil majors in Australian shale plays, with the latest coming from Chevron, which invested $349m in February to buy into acreage.

Australia’s richest person, iron ore magnate Gina Rinehart, has also entered the business, buying into Lakes Oil early this year.

In contrast, China seems to have been reluctant to allow foreign companies to make significant inroads in its shale reserves, although this may be changing.

State-owned giants PetroChina and Sinopec have made some efforts to drill shale wells, but high costs appear to have tempered their enthusiasm.

This prompted China to award exploration licences to 16 companies in 2012 — the problem was that none of them had ever drilled a shale well before. Only a handful have been drilled and fractured in the most promising basin, Sichuan/ Chongqing, and none have yet resulted in commercial output.

Hess Corp entered an agreement to develop a block with PetroChina in July. Hess joins Royal Dutch Shell, Total, Conoco- Phillips, Exxon Mobil, BP and Chevron in trying to get projects under way.

China’s target of 6.5bn cubic metres of shale production by 2015 looks optimistic, and even if achieved, this would be less than 3% of what US shale gas output was in 2011.

China also faces pressure from competing land use, lack of water and a lack of infrastructure to take gas to major population centres.

China’s difficulties place Australia in prime spot to get second-mover advantage, but this doesn’t mean a shale gas revolution on the scale of the US is likely.

Far more likely is that development will be slower and linked to capacity to liquefy and export the gas. Also likely is that the junior firms active in the shale plays will chase higher value liquids first and gas second, as is happening in the US.

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