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Despite Global Glut, China Doubles Down on Natural Gas

Despite Global Glut, China Doubles Down on Natural Gas thumbnail

A global natural-gas glut has slowed the U.S. shale boom, but in this Yangtze River town, a Chinese one is just starting.

China’s state-owned energy companies, their profits decimated by the commodities bust, are pushing ahead with billions of dollars in new investment to extract gas from shale. Leading the charge is China Petroleum & Chemical Corp. , or Sinopec, which aims to double domestic gas production within five years.

Sinopec’s push now, amid a global oversupply of gas, presents a curveball for an industry already in turmoil. If it succeeds, China’s need for imported liquefied natural gas may dwindle—potentially jeopardizing tens of billions of dollars in planned investment from Canada to Papua New Guinea.

China has huge shale reserves, but challenges from complicated geology to an inadequate pipeline network long made tapping them elusive. But with stifling pollution in many cities, natural gas offers a cleaner alternative to coal. Developing this industry will also help protect jobs at home.

Much of the planned Chinese expansion will come from the Appalachia-like region near Fuling, in central China, where tobacco plots are nestled among rolling hills, and where underground rock formations hold some of the biggest reserves of shale gas outside North America.


Sinopec’s investment is transforming a region caught between China’s past and its future. Farmers in sandals plod along winding country roads, woven baskets hitched to their backs. In Jiaoshi, Sinopec’s local base, workers in red jumpsuits clutch iPhones along the town’s main street, named after a Sinopec oil field.

In taking on this challenge, Sinopec is betting that the country’s future appetite for natural gas will strengthen. Consumption grew 3.3.% last year, down from recent double digits.

“The space for this market is still rather huge,” said Hu Degao, general manager of Sinopec’s Fuling unit, run partly from makeshift offices resembling shipping containers.

Gas production will top 5 billion cubic meters this year, up from 3 billion in 2015. By 2017, it aims to raise Fuling production capacity to 7 billion.

Its shale push is helped along by government subsidies and political support—meaning there is less environmental debate around shale-gas production than in the U.S.

Some industry experts see Sinopec’s gambit as a bid to balance out faltering production from aging oil fields. Sinopec crude output plunged 11.4% in the first half versus 2015. Meanwhile weak demand from China helped Asian spot prices for liquefied natural gas tumble 70% from 2014 highs, according to S&P Global Platts.

“By growing gas production they are effectively trying to mitigate what’s happening on the oil side of the business,” said Neil Beveridge, an analyst at Bernstein Research in Hong Kong. Developing shale “looks like more of a volume strategy than a value strategy.”

The company once chiefly served as an oil refiner, but has shifted more to oil and gas production to grow profit. Sinopec touts natural gas as key to its future as its aging oil fields become more expensive to pump.

While Sinopec says gas demand has been slower than the company once forecast, executives expect that to change as the central government pushes China toward cleaner energy sources.

Whether Sinopec can hit its production goal is another question. The company says gas production rose 10% in the first half from a year earlier. It will need significantly higher output the rest of the year to hit a growth target of about 18%.

Hu Degao, general manager of Sinopec's unit in Fuling, says he sees a big future for shale-gas development in China. ENLARGE
Hu Degao, general manager of Sinopec’s unit in Fuling, says he sees a big future for shale-gas development in China. Photo: Brian Spegele/The Wall Street Journal

Sinopec acknowledges costs and other challenges in Fuling, and says it is working to overcome them. To help curry favor, it gave a 1% stake in its Fuling unit to a local government investment firm. That gives local officials an incentive to help Sinopec succeed.

It’s tough to gauge how locals view Fuling’s shale fever. Local officials blocked a Wall Street Journal reporter from interviewing villagers near Jiaoshi. Township officials said independent interviews weren’t allowed.

Sinopec’s success partly depends on how well Mr. Hu, the Fuling subsidiary’s general manager, does his job.

Over the past few years, Mr. Hu says Sinopec made progress in replicating the U.S. boom. The company is learning much about the local geology, which can be more complicated than in the U.S. Equipment that was once imported is now made more cheaply by domestic suppliers, Sinopec says.

Mr. Hu says the cost to drill one well has fallen from 90 million yuan a couple of years ago to around 70 million yuan. He’s also looking to cut costs further.

A 30-year oil-patch veteran, Mr. Hu relishes hourlong evening walks in the countryside near the Jiaoshi base after work. He said shale is critical to making energy in China cleaner.

“The environment here needs the development of natural gas,” he said.


6 Comments on "Despite Global Glut, China Doubles Down on Natural Gas"

  1. Sissyfuss on Sun, 31st Jul 2016 9:32 am 

    The last thing the “environment” needs is development of any kind, especially FFs.

  2. rockman on Sun, 31st Jul 2016 9:50 am 

    “A global natural-gas glut has slowed the U.S. shale boom”. Given that the US remains a NET NG IMPORTER the global supply has played no part in the slow down of US NG development from shales or any other plays. US LNG imports represent less than 2% of domestic consumption. In fact US NG wellhead prices have recovered to the same level they were a year ago. Yet the rig count in the hottest shale play, the Marcellus, is currently down 80% from its peak.

  3. onlooker on Sun, 31st Jul 2016 9:52 am
    Water and air are contaminated during the fracking shale gas extraction process
    Also China is not so confident about this “glut” obviously

  4. rockman on Sun, 31st Jul 2016 6:56 pm 

    “Texas -In December 2010, the EPA determined that natural gas drilling by Range Resources near homes in Parker County, Texas caused or contributed to the contamination of at least two residential drinking water wells with “extremely high levels of methane,” as well as benzene. The EPA ordered the company to step in immediately to stop the contamination, provide drinking water to the affected residents…The EPA said it has data showing the presence of natural gas at the two wells, and ordered Range to investigate other nearby properties to determine if their drinking water is at risk.”

    It seems the report ran out of space and didn’t present the rest of the FACTS. Such as the contamination claims were a conspiracy designed to extort money from Ranger. And the proof: testimony from co-conspirators themselves when faced with arrest by the state. The video of the landowner showing a big flame coming out of his water hose made the rounds big time on the Internet. The flame was NG being burned. And it did come from his water well. As it had for decades before any oil/NG drilling had happened in the area. Additional proof presented by the state water board showing natural NG contamination of the fresh water aquifer had been documented for decades. And the NG wasn’t coming from the water line but a second line the owner had installed years earlier to siphon the NG from the well.

    In a unusual move Ranger filed a huge lawsuit against the landowner. Usually when such fraud attempts are discovered companies typically don’t go after the crooks.

    Of course accidental (and even intentional) contamination has happened. But here’s the problem with erroneous reports especially intensional misrepresentation such as this portion of the link: it damages the credibility of legitament complaints. Obviously the author knew the complete story (it was widely documented on the internet) and chose not to show all the facts.

    Thus the obvious question: is the rest of the report honestly presented? I don’t know because I haven’t fact checked the rest after discovering the obvious attempt to intentionally misrepresent that one portion. It destroys its credibility IMHO and I wasn’t going to waste anymore time. Same true for the other link: if one obvious lie is presented perhaps the other isn’t worth reading.

    The Rockman knows contamination does happen: twice he’s testified as an expert witness ON BEHALF OF THE LANDOWNER. And twice he helped state regulators bust illegal dumpers.

    Also how would the Rockman feel in frac’ng has never been allowed? He would be happier then a puppy with two penises. LOL. Really. The Rockman has never been an unconventional player. Those efforts by others have severely damaged the revenue streams from his conventional wells. Yes: the Rockman does have a dog in this fight. A dog that wants to rip the frackers a new asshole because of the competition they represented. But the facts are the facts. And intentionally misrepresenting the facts hurt the truth hunting effort.

  5. makati1 on Wed, 3rd Aug 2016 7:51 pm 

    China is preparing for a war with the US, or so it seems. Why rely on imports when you can recover your own? Overland pipelines to the ME. Pipelines from Russia. Stockpiles of everything you can imagine. The Chinese are NOT stupid.

    And, no, you cannot compare China with the US in any practical area. Totally different government setup. Totally different outlook on life. A 5,000 year old culture. The US has none.

  6. makati1 on Wed, 3rd Aug 2016 7:52 pm 

    BTW: Quadruple the US population to 1,200,000,000 and see what kind of situation you would have. Worse, I bet.

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