Don't discount Chinese shale-gas boom

DON'T write off a Chinese shale gas boom just yet, despite disappointing early results, because the Asian powerhouse will find ways to produce from its vast resources, one of the world's leading consulting firms, AT Kearney, has warned.

And, once it has started, the Chinese government could support production over imports even if they are not profitable, according to AT Kearney's London-based head of oil and gas Richard Forrest.

Late last year, Shell said things in China had not been going as smoothly as had been hoped, while Chevron said there had been a reduction in the estimates of China's overall shale potential.

The early disappointments in what had been touted as a nation being able to replicate the US shale revolution led Boston consultants Lux Research to declare last month that Australia had overtaken China as having the potential to host the next big shale market.

But Mr Forrest said he did not share the pessimism around China. "China clearly has a commitment under the 12th five-year plan and has started to make the investments," he told The Australian during a visit to Melbourne last week.

"We believe the pace of that will be determined to a large extent by getting mid-stream infrastructure in place, but we see China in the next five to 10 years as being a player."

Despite recent disappointing test results and the terrain being more difficult than that in North America, AT Kearney believes operators in China will find different ways to use technology to produce shale gas and replicate the process.

"A big question is, even if the economics don't work, will China prefer to produce shale gas over importing to support that market," Mr Forrest said.

The potential for this has been shown in the aluminium sector, where China has developed a clear overcapacity and brought structural change in the industry.

Still, Mr Forrest believes the impact on the Asian gas market targeted by Australia for LNG shipments may not be huge.

"With the (small) amount of LNG Asia is taking today and lack of substitution options for gas, especially due to coal displacement issues, makes it a challenge to see an of oversupply in Asia" Mr Forrest said.

He noted there were certain "perfect storm" scenarios where Chinese gas could flood the Asian market, though these were unlikely.

Growing Asian demand means AT Kearney does not believe US LNG exports will have a big effect on the Asian LNG prices that Australian gas exports receive by 2020.

The main reason is that if US gas prices head to between $US5 and $US6 per million British thermal units, as some are forecasting, there will be little difference between US LNG exports and Asian gas prices when the price of shipping US LNG is added.

US gas prices have been trading higher in recent months during the US's extreme bout of cold weather, but have began to retrace those gains.

Still, some analysts see longer-term prices heading up to $US6.

AT Kearney's Melbourne-based principal Ani Chakraborty said that by 2020 an LNG supply deficit of between 60 million and 80 million tonnes a year was expected. Despite surging costs in recent years that have dented Australia's reputation as a place to construct, further projects here were expected to fill some of the demand.

"Australia has a long history as a gas exporter, which is valued by customers," Mr Chakraborty said.

"When this wave of new projects is over and everything settles down, industry can probably find some more solutions."

Rather than a lot of new projects, expansions of existing projects were expected to be pursued because they made more economic sense, he said.

(The Australian , Feb 10, 2014)