China's Shale Gas Development Potential

China's potential in shale gas production is nearly as staggering as its potential growth in demand for natural gas. The U.S. Energy Information Administration estimates that China possesses by far the world's largest reserves of technically recoverable shale gas. Although China's shale gas industry is not as advanced as the United States', it could be the most advanced outside of North America. China's target is to produce 60 billion to 100 billion cubic meters of shale gas by 2020, but there are severe limitations to hitting the target. China is more likely to produce somewhere around 25 billion cubic meters of shale gas by then. In total, China will realistically be able to access 275 billion cubic meters to perhaps 300 billion cubic meters of natural gas from land-based (both piped and domestic) sources by 2020. It remains unclear whether this will be able to satisfy most of China's demand. Should China's demand reach higher estimates, such as Barclay's 450 billion cubic meters by 2020 or the Chinese Ministry of Land and Resources' 380 billion cubic meters, China could be forced to import as much as 150 billion cubic meters of liquefied natural gas by 2020.

That kind of demand could very easily overwhelm liquefied natural gas markets internationally, ensuring that liquefied natural gas supply diversification will not lead to lower prices. However, this is unlikely, because there will remain an intrinsic link between China's domestic supply and domestic demand. While China has been pushing for natural gas to offset coal and oil, Beijing still must balance two competing needs: the need for natural gas to replace those other sources and the strategic risks of overreliance on foreign sources of natural gas (as opposed to coal, which it can largely produce domestically). As a result, China's overall demand for imported natural gas -- including liquefied natural gas -- will be related to the success and pace of its shale gas development.

Additionally, the most likely scenario in which China's liquefied natural gas demand would increase dramatically is one in which liquefied natural gas prices do not skyrocket but are low enough that it would be worth importing large volumes of natural gas despite the strategic losses. Either way, China would still be importing small volumes of liquefied natural gas and has every interest in working with Japan, South Korea and other liquefied natural gas importers in order to manage prices. However, China's potential demand spikes leave those other liquefied natural gas importers worried -- especially those, such as Japan, that have few options other than importing liquefied natural gas.

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