What happens if China goes the way of the US on fracking?

9 May 2014
Zhenbo Hou
Comment
An almost unnoticed energy revolution took place in the United States around the mid-2000s, as fracking kicked off on a large scale and increased domestic production of shale gas by $16 billion by 2012. Among the victims of this new production were developing countries that ended up exporting 50% less natural gas to the US than beforehand. This is equivalent to a $1.5 billion loss of natural gas revenue – a figure that might be small in absolute terms, but significant for small and vulnerable economies. Trinidad and Tobago – a major supplier of natural gas to the US – suffered a loss of more than 3% of GDP.

What happens if China goes the same way? According to the United  States Energy Information Administration (EIA),  China has the largest technically recoverable shale gas resources in the world. Yet, little is known about what might happen if these reserves were to be exploited – particularly for developing countries that are exporting gas to China.

Moreover, it’s clear that fracking and the ‘shale gas revolution’ could offer a major jolt to the geopolitics of energy – and have profound effects on economies of developing countries. I and some colleagues at ODI have been investigating the potential repercussions – outlined in a research paper launched this week.

Based on this research I see three major areas of potential change:

  1. Chinese production altering markets and prices, creating new risks for developing countries. Currently, China produces very little shale gas – about 200 million cubic meters or around 0.1% of its total consumption. However, this is likely to increase to 6.5 billion by 2015 according to the China government’s Shale Gas Development Guidance 2011 -2015. By 2020, shale gas production is projected to rapidly surge by ten-fold to 60-100 billion cubic meters. Such figure is still small comparing to about 295 billion cubic meters shale gas US produced in 2012. Assuming China continues to import 31.6% (2013 ratio) of its natural gas by 2020, China’s shale gas production would in effect reduce its natural gas imports by up to 40%. Moreover, one of the side benefits of the fracking is the production of other energy products such as tight oil and some of the same countries that may already be adversely affected by the US may be similarly affected if production in China also generates a similar magnitude of shock. Since many of China’s energy suppliers are developing countries, such risks are very significant and should not be overlooked.
  2. In the medium to long run, the fracking revolution has the potential to influence geopolitical outcomes by creating new winners and losers. Clearly, the US and China stand to benefit from more energy independence and therefore more energy security. In China’s case, there could be less friction in the South China Sea, which some believe was motivated by the underlying oil and gas fields. On the other hand, existing major energy producers stand to fall from their current market power. Organization of the Petroleum Exporting Countries (OPEC) even predicts that its market share for crude oil to fall from 41% in 2013 to 39% by the end of the decade, while production levels in the US and Canada continue to rise rapidly and it would be interesting to see to what extent such loss of market share could cause OPEC to lose its grip on international oil price.
  3. Russia is also likely to suffer some of the largest negative consequences of shale gas exploration, as 40% of its fiscal revenue comes from oil and gas exports. Russia uses its strong position as an energy exporter to influence politics abroad and strengthen its own position, as in the Ukrainian crisis. At the moment, Ukraine is anticipating a steep rise in the price of Russian energy imports with the possibility of further disruption to supply. Europe’s reliance on Russian energy have weakened its position to levy sanctions and subsequently led to calls to diversify energy sources. This could well incentivise some of the EU member states to develop its own fracking program in the near future.

If global policy-makers are to respond to these changes, they’re going to need to account for such risks and opportunities in their future projections. Of course, these risks can come from different channels and sources – economic, geopolitical and environmental. ODI’s latest Shock Watch bulletin examines some of these risks and opportunities for developing countries.