China on Track to Exceed 2015 Shale Target

A shale project in China’s southwest could propel the country’s shale gas output past 2015 figures once completed. The article, released on 12 March 2014 by Bloomberg, indicates the new development will help China surge past its target of 6.5 billion cubic meters of shale gas production by 2015. Sinopec is increasing capabilities at its Fuling facility near Chongqing Municipality.  The project is estimated to raise current capacity by 5 billion cubic meter at the site by 2015. Current production at the site is already reaching 2.2 million cubic meters as of 2 March. Adding to potential overall growth in Chinese shale production and development was an announcement by CNCP that private investment in shale production will be allowed under new government reforms.

The Chinese government’s current shale target is 6.5 billion cubic meters by 2015, making the Fuling site a large boost to Chinese shale production and distribution within the region. China produced only 200 million cubic meters of shale gas in 2013, adding to the importance of the project.The Fuling project will also work to amply shale gas efforts in neighboring Sichuan Province. Sichuan currently has nine active shale gas well with 110 estimated to begin production by the end of 2015. The project will also help China reduce its overall energy imports of which 5.63 billion cubic meters of natural gas was imported.

The project is not without drawbacks. The heavy water demands of fracking means that Sichuan and Chongqing will probably be the main hubs of Chinese shale production for the short-term. Compared to other shale regions in China, Sichuan and Chongqing have the abundant water resources to move shale gas expansion project forward. Infrastructure is also another issue for Chinese shale production. Sichuan and China’s southwest do possess gas pipelines however not to the extent that other, conventional gas production and transit regions do. Currently, pipelines in the region move in an west-east or south-north direction. Sichuan has limited pipeline access to other areas of China and almost no pipeline infrastructure exists in the southern half of China. A new policy initiated in 2014 to allow third-party access to pipelines will help to increase overall distribution efficiency once the policy is finalized. The third-party access policy is designed to meet structural limitations on unconventional gas that currently exist. This will not replace the need for additional infrastructure in the region in order to make the increased production more accessible to consumers. The recent announcement about Fuling brings encouraging news to China’s shale gas industry but more will be needed to supplement the project than just localized investment.

Chaori Solar

On 4 March 2014, Chaori Solar became the first Chinese onshore company to default on a corporate bond. While news of the default speaks more to bonds and finance in China, it is important to understand what effects, if any, Chaori’s default has on the Chinese solar industry. Shanghai based Chaori began operations in 2003 and undertakes research, development, and manufacturing of so-called solar solutions. Chaori’s products page indicates the company produces crystalline  modules, solar cells, solar wafers, and solar-powered lamps. For more information on Chaori here is a link to the company’s English and Chinese websites.

Chaori is one of a multitude of Chinese solar companies whose existence resulted in market overcapacity. Cheap finance and local government support created a glut in the Chinese solar market. Previous state bailouts of the corporate bond market made investment in such bond seem like a sure thing, fueling high levels of investment not just in the solar industry but in others as well. The Chinese government has worked to reform the corporate bond market to move away from creating artifical safety through bailouts. A default by any company was a likely outcome of these market oriented reforms. In this sense, Chaori is only special in being the first to do so, and overseas defaults by Chinese companies occurred previous to Chaori’s. Investor reaction to the news has been mild, suggesting the whole situation was not entirely unexpected. Given the overcapacity in the solar industry it was likely that a Chinese solar company had a higher potential to default. Chaori is also not a state-owned company (SOE) meaning there was less incentive for the government to step in with a bailout offer.

Given the realities of China’s solar industry, it is likely that as government restrictions are lifted and market forces take over there will be some minor, short to mid-term turbulence. Further defaults might take place and consolidation is highly likely. The overall outcome will hopefully be a more efficient and profitable Chinese solar industry that is less dependent on government backing to survive. Chaori’s default is not likely to cause a domino effect. The company has already moved to sell its overseas solar farms in order to gain necessary funds to cover the default. All things considered, Chaori’s bond default will have a greater impact on the Chinese bond market than the overall solar industry. How that impacts China’s overall energy industry is yet to be seen.

Pollution Heads Out West

A  6 March 2014 article from Bloomberg indicates the Chinese government has carried out a directive to move power plants into western China in a bid to lessen pollution in eastern cities. The article is pared with a great infographic to help visualize the intensity of the new policy and the almost disproportional effects on Xinjiang Province. Xinjiang has long been a source of oil and gas for China and now with growing power needs throughout the country, the region’s coal deposits are quickly becoming a high-demand commodity. The new policy includes the operation of 20 coal-fired power plants and coal gasification facilities within Xinjiang. As the pollution control demands of eastern Chinese rise, the number of new polluting facilities rises in western China. Although the projects are pitched as providing economic growth and development, the many non-ethnic Chinese minorities that live in western China believe they will receive little if any benefit.

Chinese pollution has long been a topic of discussion given the frighteningly high levels of air pollution paraded throughout the media. Attempts by the central government to reign in polluters and implement environmental policies have met with few results. By shifting antipollution measures from actually compliance to relocation, the Chinese government stands to create a dangerous illusion of pollution control by simply spreading out the sources of pollution. What makes the build-up of these coal-fired power plants and coal gasification facilities really unfortunate is that the environmental problems they produce will go most likely go unanswered at least until 2030, the end of said facilities utility preemptive power production time line.

Many individuals interviewed in the article are already suffering from health ailments and reduced economic prosperity at times less than a year after a facility had been built. The Chinese government has invested heavily in green and renewable energy previously with a significant amount of China’s wind energy coming from Xinjiang. While these energy production methods alone cannot account for all of China’s future energy needs, coal can certainly not be a viable, long-term option. The majority of the people that live near these coal consuming facilities are already experiencing adverse health and agricultural affects. Health and agricultural denigration make the promise of economic development and prosperity moot. Further limiting the desirability of these facilities is that attempts by the local communities to find some accountability are met with dismissal or vague threats of separatism. China’s growing power needs are an important issue that needs to be addressed but if the result is more harmful than beneficial policy implementation needs to be reevaluated and revised.