THE RISE OF CHINA AND ITS ENERGY IMPLICATIONS ENERGYforum James A. Baker III Institute for Public Policy • Rice University Quantitative Analysis of Scenarios for Chinese Domestic Unconventional Natural Gas Resources and Their Role in Global LNG Markets Kenneth B. Medlock III, Ph.D. Peter R. Hartley, Ph.D.
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THE RISE OF CHINA AND ITS ENERGY IMPLICATIONS
ENERGYforumJames A. Baker III Institute for Public Policy • Rice University
Quantitative Analysis of Scenarios for Chinese Domestic Unconventional Natural Gas Resources and
Their Role in Global LNG MarketsKenneth B. Medlock III, Ph.D.
Peter R. Hartley, Ph.D.
JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY RICE UNIVERSITY
Quantitative Analysis of Scenarios for Chinese Domestic Unconventional
Natural Gas Resources and Their Role in Global LNG Markets
By
Kenneth B. Medlock III, Ph.D.
JAMES A. BAKER, III, AND SUSAN G. BAKER FELLOW IN ENERGY AND RESOURCE ECONOMICS, JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY, RICE UNIVERSITY
AND
Peter R. Hartley, Ph.D.
RICE SCHOLAR, JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY, AND GEORGE AND CYNTHIA MITCHELL CHAIR OF ECONOMICS, RICE UNIVERSITY
PREPARED BY THE ENERGY FORUM OF THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY
AS PART OF THE STUDY THE RISE OF CHINA AND ITS ENERGY IMPLICATIONS
DECEMBER 2, 2011
Scenarios for Chinese Domestic Unconventional Natural Gas Resources
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THIS PAPER WAS WRITTEN BY A RESEARCHER (OR RESEARCHERS) WHO PARTICIPATED IN THE
JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY STUDY. THE RESEARCH AND THE VIEWS
EXPRESSED WITHIN ARE THOSE OF THE INDIVIDUAL RESEARCHER(S) AND DO NOT
NECESSARILY REPRESENT THE VIEWS OF THE JAMES A. BAKER III INSTITUTE FOR PUBLIC
THIS MATERIAL MAY BE QUOTED OR REPRODUCED WITHOUT PRIOR PERMISSION, PROVIDED APPROPRIATE CREDIT IS GIVEN TO THE AUTHOR AND
THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY.
Scenarios for Chinese Domestic Unconventional Natural Gas Resources
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ACKNOWLEDGMENTS
The Energy Forum of the James A. Baker III Institute for Public Policy would like to thank The Institute of Energy Economics, Japan, and the sponsors of the Baker Institute Energy Forum for their generous support of this program. The James A. Baker III Institute for Public Policy would also like to thank Deloitte MarketPoint LLC for its continued support of the Energy Forum’s natural gas modeling efforts. The Energy Forum further acknowledges contributions by study researchers and writers.
ENERGY FORUM MEMBERS
ACCENTURE AFREN RESOURCES, USA AIR LIQUIDE U.S.A. LLC
AIR PRODUCTS AND CHEMICALS, INC. THE HONORABLE & MRS. HUSHANG ANSARY
APACHE CORPORATION BAKER BOTTS L.L.P.
BAKER HUGHES INCORPORATED BG GROUP PLC
BP CALIFORNIA ENERGY COMMISSION
CHEVRON CORPORATION CONOCOPHILLIPS
DELOITTE ENERGY FUTURE HOLDINGS CORPORATION
EXXON MOBIL CORPORATION GENON ENERGY, INC. HESS CORPORATION
HORIZON WIND ENERGY THE INSTITUTE OF ENERGY ECONOMICS, JAPAN (IEEJ)
IPR – GDF SUEZ NORTH AMERICA KOCH SUPPLY AND TRADING
SHELL OIL COMPANY SHELL EXPLORATION & PRODUCTION CO.
TOTAL E&P NEW VENTURES, INC. TOTAL E&P USA, INC.
TUDOR, PICKERING, HOLT & CO. LLC VAALCO ENERGY, INC.
WALLACE S. WILSON
SUPPORTING MEMBERS
DELOITTE MARKETPOINT LLC ENERGY INTELLIGENCE
Scenarios for Chinese Domestic Unconventional Natural Gas Resources
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ABOUT THE STUDY
The Rise of China and Its Energy Implications is a major research initiative to investigate the implications of China’s oil and natural gas policies and domestic energy market development on global energy markets. This study focuses on the influence of China’s energy development on U.S. and Japanese energy security and global geopolitics. Utilizing geopolitical and economic modeling and scenario analysis, the study analyzes various possible outcomes for China’s domestic energy production and its future import levels. The study considers how trends in China’s energy use will influence U.S.-China relations and the level of involvement of the U.S. oil industry in China’s domestic energy sector.
STUDY AUTHORS
JOE BARNES JAMES D. COAN
JAREER ELASS MAHMOUD A. EL–GAMAL
PETER R. HARTLEY AMY MYERS JAFFE STEVEN W. LEWIS DAVID R. MARES
KENNETH B. MEDLOCK III RONALD SOLIGO RICHARD J. STOLL
ALAN TRONER
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ABOUT THE ENERGY FORUM AT THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY
The Baker Institute Energy Forum is a multifaceted center that promotes original, forward-looking discussion and research on the energy-related challenges facing our society in the 21st century. The mission of the Energy Forum is to promote the development of informed and realistic public policy choices in the energy area by educating policymakers and the public about important trends—both regional and global—that shape the nature of global energy markets and influence the quantity and security of vital supplies needed to fuel world economic growth and prosperity. The forum is one of several major foreign policy programs at the James A. Baker III Institute for Public Policy of Rice University. The mission of the Baker Institute is to help bridge the gap between the theory and practice of public policy by drawing together experts from academia, government, the media, business, and nongovernmental organizations. By involving both policymakers and scholars, the institute seeks to improve the debate on selected public policy issues and make a difference in the formulation, implementation, and evaluation of public policy.
JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY RICE UNIVERSITY – MS 40
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ABOUT THE INSTITUTE OF ENERGY ECONOMICS, JAPAN
The Institute of Energy Economics, Japan (IEEJ), was established in June 1966 and specializes in research activities in the area of energy from the viewpoint of Japan’s national economy in a bid to contribute to sound development of Japanese energy supply and consumption industries and to the improvement of domestic welfare by objectively analyzing energy problems and providing basic data, information and the reports necessary for policy formulation. With the diversification of social needs during the three and a half decades of its operation, IEEJ has expanded its scope of research activities to include such topics as environmental problems and international cooperation closely related to energy. The Energy Data and Modeling Center (EDMC), which merged with the IEEJ in July 1999, was established in October 1984 as an IEEJ-affiliated organization to carry out such tasks as the development of energy data bases, the building of various energy models, and the econometric analyses of energy.
THE INSTITUTE OF ENERGY ECONOMICS, JAPAN INUI BUILDING
KACHIDOKI 10TH, 11TH, AND 16TH FLOOR 13-1, KACHIDOKI 1–CHOME
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ABOUT THE AUTHORS
KENNETH B. MEDLOCK III, PH.D. James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics James A. Baker III Institute for Public Policy, Rice University Kenneth B. Medlock III, Ph.D., is the James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics at the Baker Institute and an adjunct professor and lecturer in the Department of Economics at Rice University. Currently, Medlock heads the Baker Institute Energy Forum’s natural gas program and is a principal in the development of the Rice World Natural Gas Trade Model, which assesses the future of international natural gas trade. He also teaches energy economics courses and supervises students in the energy field. Medlock studies natural gas markets, gasoline markets, energy commodity price relationships, transportation, modeling national oil company behavior, economic development and energy demand, forecasting energy demand, and energy use and the environment. Medlock is a council member of the International Association for Energy Economics (IAEE), and a member of United States Association for Energy Economics (USAEE), The American Economic Association and the Association of Environmental and Resource Economists. In 2001, he won (with Ron Soligo) the IAEE Award for Best Paper of the Year in the Energy Journal. In 2011, he was given the USAEE’s Senior Fellow Award. Medlock also served as an adviser to the U.S. Department of Energy and the California Energy Commission in their respective energy modeling efforts. He was the lead modeler of the Modeling Subgroup of the 2003 National Petroleum Council (NPC) study of long-term natural gas markets in North America, and is involved in the ongoing NPC study North American Resource Development. Medlock received his Ph.D. in economics from Rice and held the MD Anderson Fellowship at the Baker Institute from 2000 to 2001. PETER R. HARTLEY, PH.D. Rice Scholar, James A. Baker Institute for Public Policy George and Cynthia Mitchell Chair of Economics, Rice University Peter R. Hartley, Ph.D., is the George and Cynthia Mitchell Chair and a professor of economics at Rice University. He is also a Rice scholar of energy economics for the James A. Baker III Institute for Public Policy. Hartley has worked for more than 25 years on energy economics issues, focusing originally on electricity, but also including work on natural gas, oil, coal, nuclear, and renewable energy. He wrote on reform of the electricity supply industry in Australia throughout the 1980s and early 1990s and advised the government of Victoria when it completed the acclaimed privatization and reform of the electricity industry in that state in 1989. Apart from energy and environmental economics, Hartley has published research on theoretical and applied issues in money and banking,
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business cycles, and international finance. He worked for the Priorities Review Staff, and later the Economic Division, of the Prime Minister’s Department in the Australian government. He came to Rice as an associate professor of economics in 1986 after serving as an assistant professor of economics at Princeton University from 1980 to 1986. Hartley completed an honors degree in mathematics and a master’s degree in economics at The Australian National University. He obtained a Ph.D. in economics at The University of Chicago.
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I. Introduction1
The past decade has yielded dramatic change in the natural gas industry. Specifically, there has
been rapid development of technology allowing the recovery of natural gas from shale
formations. This technology has been applied with much success in North America, and there is
much interest in seeing similar developments in other countries around the world. Since 2000,
production of natural gas from shale formations in North America has dramatically altered the
global natural gas market landscape. In fact, the emergence of shale gas is perhaps the most
significant development in global energy markets in the last decade.
Knowledge of the shale gas resource is not new as geologists have long known about the
existence of shale formations, and accessing those resources was long held in the geology
community to be an issue of technology and cost. In the past decade, innovations involving the
use of horizontal drilling with hydraulic fracturing have yielded substantial cost reductions,
making shale gas production a commercial reality. In fact, shale gas production in the United
States has increased from virtually nothing in 2000 to over 10 billion cubic feet per day (bcfd) in
2010, and it is expected to more than quadruple by 2040, reaching over 50 percent of total U.S.
natural gas production by the 2030s (see Figure 1).
Figure 1. U.S. Natural Gas Production through 2040 (Reference Case)
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To be sure, shale gas developments in North America have had a ripple effect across the globe
by displacement of supply in global trade and by fostering a growing interest in shale resource
potential in other parts of the world. Thus, North American shale gas developments are having
effects far beyond the North American market, and these impacts are likely to expand over time.
The state of knowledge regarding the portion of shale gas that is economically recoverable has
changed rapidly over the last 10 years. A simple chronology of assessments for North America,
where most development activity has occurred to date, is as follows:
• As recently as 2003, the National Petroleum Council2 estimated that about 38 tcf of
technically recoverable resource was spread across multiple basins in the North America.
• In 2005, the Energy Information Administration (EIA) was using an estimate of 140 tcf
in its Annual Energy Outlook as a mean for North American technically recoverable shale
gas resource.
• In 2008, Navigant Consulting, Inc.3 estimated a mean of 280 tcf of technically
recoverable resources from reviewable geologic literature, but a survey of producers
indicated up to 840 tcf.
• In 2009, the Potential Gas Committee4 put its mean estimate at just over 680 tcf.
• In 2011, Advanced Resources International (ARI) reported an estimate of about 1,930 tcf
of technically recoverable resource for North America, with over 860 tcf in U.S. gas
shales alone.5
Importantly, although each assessment is from an independent source, the estimates are
increasing over time as more drilling occurs and technological advances are made. Moreover, the
shift in the generally accepted assessment of recoverable shale resource has left producers,
consumers, and governments all grappling with the implications for markets as well as the
geopolitical repercussions.
Shale gas developments stand to exert enormous influence on the structure of the global gas
market. Throughout the 1990s, natural gas producers in the Middle East and Africa, anticipating
rising demand for LNG from the United States in particular, began investing heavily in
expanding LNG export capability, concomitant with investments in regasification being made in
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the United States. But the rapid growth in shale gas production has turned such expectations
upside down and rendered many of those investments obsolete. Import terminals for liquefied
natural gas (LNG) are now scarcely utilized, and the prospects that the United States will become
highly dependent on foreign imports in the coming years are receding.
Rising shale gas production in the United States is also having an impact on markets in Europe
and Asia. In particular, LNG supplies whose development was anchored on the belief that the
United States would be a premium market are now being diverted to European and Asian buyers.
Not only has this immediately presented consumers in Europe with an alternative to Russian
pipeline supplies, it is also exerting pressure on the status quo of indexing gas sales in both
Europe and Asia to a premium marker determined by the price of petroleum products. In recent
rounds of renegotiations, Russia has had to accept far lower prices from many of its traditional
long-term customers and has accepted a partial link to gas on gas pricing.
Revelations about the potential for increased shale gas production are also occurring in other
regions around the world, with shale gas discoveries being discussed in Europe, China, India,
Australia, and elsewhere. To be sure, the enormity of global shale gas potential will have
significant geopolitical ramifications and exert a powerful influence on U.S. energy and
foreign policy.
In this study, we utilize scenario analysis to examine the role that China plays in the future of
global gas market developments. In doing so, we consider two cases, which we compare to a
reference case, where:
1. China’s technically recoverable shale resource base is dramatically larger; and