--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Sept 17 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
United States in bringing significant production on line.
While it's clear that the United States 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 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 United States.
If shale gas were a marathon, the United States is already
at the half-way mark, running at a comfortable pace. Australia
is a few hundred metres into the race and China has barely
crossed the starting line.
The good news is that other potential runners are nowhere in
the picture. Argentina and Mexico, which have the second- and
sixth-highest potential reserves, are still in the changing
rooms, as is eighth-ranked South Africa.
In those three countries, political and investment risks
mean they are unlikely to start developing shale any time soon,
if their governments wanted to.
Other countries, such as Britain, have yet to decide if they
can run the race, while France has declined to enter and Poland
looks like it has pulled up lame.
Australia has several advantages over China when it comes to
developing shale gas reserves, despite its potential resource,
estimated at about 437 trillion cubic feet by the Energy
Information Administration, being about 40 percent of China's
1,115 trillion cubic feet.
Chief among them is that much of the shale reserves are
located in remote basins, away from population centres.
This means the potential opposition from farmers and
environmentalists is reduced and shale drilling is less
disruptive to other segments of the economy.
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
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
EASY FOR GLOBAL GIANTS
Australia's other significant advantage over China is that
it is an easy place for global majors to invest and 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 $349 million in February to buy into
Others that have farmed into Australian shale include
ConocoPhillips, France's Total, Japan's
Mitsubishi Corp and India's Bharat Petroleum.
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 late 2012 - problem was that none of them had ever
drilled a shale well before.
So far, only a handful of wells have been drilled and
fractured in China's most promising basin, Sichuan/Chongqing,
and none have yet resulted in commercial output.
Foreign firms are becoming more involved in China, with Hess
Corp entering an agreement to develop a block with
PetroChina in July.
Hess joins Royal Dutch Shell, Total,
ConocoPhillips, Exxon Mobil, BP and Chevron in
trying to get China projects underway.
But the need for joint ventures has slowed progress and most
of the majors have yet to start serious exploration programmes.
China's target of 6.5 billion cubic metres of shale
production by 2015 looks optimistic, and even if achieved, this
would be less than 3 percent of what U.S. shale gas output was
China also faces pressure from competing land use, lack of
water and a lack of infrastructure to take gas to major
The initial wells drilled also suggest that the geology may
be more challenging in China than in many of the U.S. basins,
which will add to costs and have a negative impact on economic
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 United States 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 United States.
But even going for liquids will provide benefits to
Australia as industry knowledge of local shale conditions
increases and infrastructure and investment boosts development.