China and Russia Sign Gas Deal

China and Russia signed a 30-year, $400 billion natural gas deal on 21 May 2014. The gas deal is the culmination of a decade long negotiation, believed to have gotten a final push to completion after the fallout from recent Russian actions in Ukraine. Under the gas deal, Gazprom will supply China National Petroleum Corporation (CNCP) with 38 billion cubic meters of natural gas annually. The deal also calls for the creation a 2500 mi/4000 km pipeline named Power of Siberia which will pull gas from the Chayanda gas field in Siberia to China. Russia’s first gas delivery is expected in China in 2018. Along with the natural gas deal, Russia and China signed a contract for Novatek to supply China with 3 million tons of liquefied natural gas (LNG) annually.

While both deals are significant to both countries respective needs, together they represent a massive investment in not only natural gas development but also Sino-Russian relations. Long gone are the days of the Sino-Soviet Split. For China, the deals are incredibly beneficial. As mentioned in an early post, China is undertaking a massive shift towards natural gas over coal for electricity generation. The smaller LNG deal itself helps China expand natural gas usage, especially since most of China’s LNG infrastructure is located near energy hungry urban areas.

The Power of Siberia deal is more than just a steady supply of energy from a foreign source. Traditionally, Chinese overland pipelines have been an important stage in improving relations with neighbors and setting the stage for greater economic cooperation. Sino-Russia relations have been beneficial to each country since the fall of the Soviet Union, however the Power of Siberia deal could signify a greater integration between the two countries given the long-term nature of the deal.

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.