China has been working on developing its shale gas resources for a few years now, with mixed success, mainly because of the difficult geology. But times are a changing and, due to developments in shale, Asia’s biggest economy is well on its way to becoming the world’s second-largest producer of natural gas.
The Energy Information Administration, in its latest International Energy Outlook 2016, estimates that China, which was last year producing 500 million cubic feet of shale gas daily, is on its way to ramping this up to over 20 billion cubic feet daily by 2040. While 2040 may seem a long way off, this still represents seriously significant growth, and there is more than one reason for this new focus on shale gas.
For starters, China’s oil and gas majors are suffering not just from low oil prices but also from mature fields, many of them nearing depletion. However, its energy needs are not declining, and the country is still the world’s top energy consumer, with consumption 30 percent higherthan that of the U.S., according to World Finance.
Second, while currently China relies predominantly on coal to satisfy these energy needs, it is also paying increasing attention to the environmental problems related to coal, the cheapest – and dirtiest – fossil fuel that helped its industrial revolution turn into the economic hothouse the world still looks to in hopes that Chinese consumption of energy and mining commodities will help the respective ailing industries. It’s for the very same reason that China was among the main culprits of the recent commodity price slump in both energy and metals.
So, China is becoming more conscientious about its carbon footprint, and gas is a great alternative to coal, since it’s the cleanest (or least-dirty) fossil fuel.
Third, China is finally moving away from heavy industry and towards a more service-focused economic model. This has been bad news for energy exporters that have counted on the Asian economy’s huge energy needs for much of their revenue, but it shouldn’t be too bad as the transition won’t be quick, and there is still India, who will replace China as Asia’s industrial hothouse.Related: Oil Companies Ignoring Investors
Bad news for oil has become good news for gas, and international companies have started betting on China’s shift towards gas, safe in the knowledge – or assumption – that its conventional gas resources are not enough for self-sufficiency and shale gas will be difficult to extract. Some analysts argue that shale gas in China is more hype than anything else. This may well be the case, but it’s not certain, as the EIA forecast suggests.
China has proved time and again in its modern history that when there is enough determination, things can get done. It also has a lot of motivation as well as an example in the U.S., which is now nearly self-sufficient with regard to energy thanks to the shale boom.
This drive towards self-sufficiency can have a pretty bad effect on international gas prices, as Oilprice.com warned earlier this month, if it turns out successful. Its chances of success shouldn’t be underestimated in light of the three factors listed above. China wants to decrease its energy dependency, and it looks like it’s prepared to spend heavily to develop its shale gas reserves, which are estimated to be the largest in the world, or 1.7 times greater than those in the U.S.
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Headline crude prices for the week beginning 7 January 2019 – Brent: US$57/b; WTI: US$49/b
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At some point in 2019, crude production in Venezuela will dip below the 1 mmb/d level. It might already have occurred; estimated output was 1.15 mmb/d in November and the country’s downward trajectory for 2018 would put December numbers at about 1.06 mmb/d. Financial sanctions imposed on the country by the US, coupled with years of fiscal mismanagement have triggered an economic and humanitarian meltdown, where inflation has at times hit 1,400,000% and forced an abandonment of the ‘old’ bolivar for a ‘new bolivar’. PDVSA – once an oil industry crown jewel – has been hammered, from its cargoes being seized by ConocoPhillips for debts owed to the loss of the Curacao refinery and its prized Citgo refineries in the US.
The year 2019 will not see a repair of this chronic issue. Crude production in Venezuela will continue to slide. Once Latin America’s largest oil exporter – with peak production of 3.3 mmb/d and exports of 2.3 mmb/d in 1999 – it has now been eclipsed by Brazil and eventually tiny Guyana, where ExxonMobil has made massive discoveries. Even more pain is on the way, as the Trump administration prepares new sanctions as Nicolas Maduro begins his second term after a widely-derided election. But what is pain for Venezuela is gain for OPEC; the slack that its declining volumes provides makes it easier to maintain aggregate supply levels aimed at shoring up global oil prices.
It isn’t that Venezuela doesn’t want to increase – or at least maintain its production levels. It is that PDVSA isn’t capable of doing so alone, and has lost many deep-pocketed international ‘friends’ that were once instrumental to its success. The nationalisation of the oil industry in 2007 alienated supermajors like Chevron, Total and BP, and led to ConocoPhillips and ExxonMobil suing the Venezuelan government. Arbitration in 2014 saw that amount reduced, but even that has not been paid; ConocoPhillips took the extraordinary step of seizing PDVSA cargoes at sea and its Caribbean assets in lieu of the US$2 billion arbitration award. Burnt by the legacies of Hugo Chavez and now Nicolas Maduro, these majors won’t be coming back – forcing Venezuela to turn to second-tier companies and foreign aid to extract more volumes. Last week, Venezuela signed an agreement with the newly-formed US-based Erepla Services to boost production at the Tia Juana, Rosa Mediano and Ayacucho 5 fields. In return, Erepla will receive half the oil produced – generous terms that still weren’t enough to entice service giants like Schlumberger and Halliburton.
Venezuela is also tapping into Russian, Chinese and Indian aid to boost output, essentially selling off key assets for necessary cash and expertise. This could be a temporary band-aid, but nothing more. Most of Venezuela’s oil reserves come from the extra-heavy reserves in the Orinoco Belt, where an estimated 1.2 trillion barrels lies. Extracting this will be extremely expensive and possibly commercially uneconomical – given the refining industry’s move away from heavy grades to middle distillates. There are also very few refineries in the world that can process such heavy crude, and Venezuela is in no position to make additional demands from them. In a world where PDVSA has fewer and fewer friends, recovery will be extremely tough and extremely far-off.
Infographic: Venezuelan crude production:
Headline crude prices for the week beginning 31 December 2018 – Brent: US$54/b; WTI: US$46/b
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