How shale gas can trump oil sands

Chen Weidong, an influential policy guru at government-controlled China National Offshore Oil Corp., has a blunt message for oil sands companies and investors: Get out.

The future, he says, is natural gas trapped in shale rocks.

"The oil sands are too costly and too polluting," Mr. Chen said in an interview with the Financial Post at CNOOC's shiny, modern headquarters near the centre of Beijing. "Gas has a brighter future.... Shale gas is much cheaper and cleaner.

"I'm not in favour as much as before toward Canadian oil sands because of shale gas."

Mr. Chen, CNOOC's chief energy researcher at its Energy and Economics Institute, stressed this is his opinion and not necessarily that of his company, though he has been lobbying hard for a change of view. He does not know yet whether government-controlled CNOOC has officially accepted his view, but any change could have major implications for Canada's energy patch.

Canadian governments, companies and investors are counting on wealthy stateowned energy companies such as CNOOC to fund expensive oil sands projects. CNOOC's absence from the oil sands would mean one less deep-pocked bidder scrapping to invest in northern Alberta, which holds the world's second-largest crude reserves behind Saudi Arabia. But it also means one more bidder driving up the price of unconventional natural gas assets in North America.

CNOOC is already testing the shale waters. It paid US$1.1-billion for a 33% stake in one of Chesapeake Energy Corp.' s natural gas shale fields in southeastern Texas in October. The Eagle Ford Shale investment marked the first time CNOOC, China's third-largest energy company, ventured into the United States after its failed bid for Unocal in 2005.

CNOOC does have one Canadian oil sands investment, a 15% stake in MEG Energy Corp., a Calgary-based company with two projects.

CNOOC's state-controlled kin, Sinopec Corp. and China National Petroleum Corp., see the oil sands differently. Sinopec made China's second-largest investment in North America last year, paying US$4.65-billion for a 9.03% slice of Syncrude Canada Ltd., the No. 2 oil sands operation. CNPC invested $1.9-billion in two oil sands last February.

But Mr. Chen's opinion fits with two energy realities championed by China's central government: the realization it sits on a boatload of its own unconventional natural gas and needs to sort out how to extract it; and Beijing's official mandate to reduce greenhouse gas emissions by replacing coal consumption with natural gas, oil and alternative sources of energy.

China's experience with unconventional natural gas mirrors that of North America, only the Asian state is about 10 years behind. It knows there are enormous stockpiles of cleaner-burning hydrocarbons trapped in rocks below the Earth's surface, but it does not know how to free the gas. There are about 3.07 billion cubic metres of shale reserves in China by preliminary estimates, Zhang Hongtao, chief geologist at China's Ministry of Land and Resources, said at a conference in Beijing last fall.

That number could grow exponentially. Zhang Dawei, deputy director of oil and gas strategy research at the Ministry of Land and Resources, at a separate conference in Shanghai, said China might host 26 trillion cubic meters of shale gas reserves. That is more than 10 times China's proven holdings of conventional natural gas, Bloomberg News and other sources reported in November.

Notably, China has drilled only one shale gas well.

China also sits on the world's third-largest reserves of coal-bed methane, behind Russia and Canada. Its CBM reserves ring in at 36.8 trillion cubic metres, with 4.87 trillion cubic metres of recoverable reserves located in four main areas, says Mr. Zhang, the chief geologist. In 2008, there were 1050 CBM wells drilled, up from five in 1990.

The world's entire natural gas reserves total roughly 187 trillion cubic metres as of January 2010, with North America's clocking in at about nine trillion cubic metres.

If China can further tap its own resources, it would help solve the government's challenge of easing itself off coal, the dirtiest hydrocarbon around. China's reliance on the old-school fuel far outpaces the rest of the globe.

Coal accounted for 70.1% of China's energy consumption in 2009, 41.5% higher than the world's average. Oil represented 18.7%, 16% lower than the rest of the world, and natural gas only 3.85%, 20.5% lower than other countries.

This comes as China's total energy consumption climbed 2.3 times since 1995. Natural gas emits about 1/40 of the pollution oil does, and 1/800 that of coal, Mr. Zhang told the audience in Beijing.

China's coal statistics are worse than they seem: In the past 50 years, Chinese coal mines have wasted two tonnes of coal for every tonne they produce, says Wenran Jiang, who holds the Mactaggart research chair of the China Institute at the University of Alberta, and also serves as a special advisor on China to the Energy Council, in a paper prepared for the Canadian International Council. This means China, which consumes 31% of the world's coal, lost 65 billion tonnes of coal as it produced 35 billion tonnes between 1949 and 2003.

Facing such ugly numbers, Beijing's coal, oil and gas targets are ambitious. It wants to reduce its reliance on coal to about 57%by 2020, while jacking up oil use to about 22%, and natural gas up to about 10% to 12%. Renewable power has a target of 10%, and 2% for nuclear. Renewable and nuclear power sources eat further into coal demand by 2030 and 2050, if the government's strategy unfolds as planned.

By 2020, China wants its CO2 emissions per unit of gross domestic product reduced by 40% to 45% over 2005 levels. "It is a daunting challenge for all of us," Mr. Zhang said.

China's own conventional and unconventional natural gas reserves, along with liquefied natural gas imports, largely from Australia, are expected to contribute to the country's greenhouse gas target.

As China's three stateowned energy companies drill in China and its waters, they are also making big investments in North American unconventional natural gas plays. In part, these investments are tuition paid to learn how to get at China's natural gas. Besides CNOOC's Chesapeake deal, CNPC is negotiating a deal with Encana Corp. on its unconventional natural gas fields, and Sinopec in an interview in Beijing said it has done a preliminary study on shale gas in British Columbia.

Korea National Oil Corp., which is 100% owed by the Korean government, also purchased unconventional natural gas assets when it picked up Hunt Oil Co.'s Canadian properties last month.

Back at CNOOC's new headquarters in Beijing, which sits across the street from Sinopec's head office and kitty-corner to the Ministry of Foreign Affairs, Mr. Chen doubts the oil sands will be completely shuttered, but he's sticking to his view of a grim future for that part of the oil sector.

"I think in the next 20 to 30 years, natural gas will replace oil to become the No. 1 source of energy. If anybody is smart in Canada, they should [extract and] sell their oil sands [crude] as quick as possible, otherwise it will remain in the ground."

ctait@nationalpost.com---------

-The Asia Pacific Foundation of Canada funded this reporter's research in China and South Korea