China tops the world on many lists. It has 1 billion more people than the U.S. as it is the most populated nation on earth. It leads the world in rice and wheat production. Unfortunately, China also tops the list of the countries with the highest carbon emissions. That's why China needs fracking even more than we do. Given that 29% of San Francisco's pollution is imported from China, however, the case could be made that we need China fracking, too.
Worldwide carbon emissions are up 61% since 1990. Much of that growth has been fueled by China, which contributed 27% of global carbon emissions in 2012 as it spewed out 9,621 megatons of carbon dioxide. Even more worrisome is the fact that it is growing its carbon emissions by more than 5% annually. The country's heavy usage of coal-fired power is fueling its growing pollution problems.
America, on the other hand, has seen its emissions fall. Our carbon emissions are now at the same level as 1994, at 5,118 megatons. Part of the reason for this is that we're more careful not to waste energy. We've increased our output of clean power from solar and wind. However, fracking has unlocked so much cheap and cleaner natural gas that we've used to replace coal, which has lowered our carbon emissions. In 2012, the U.S. increased natural gas power generation by 211.8 billion kilowatt hours over 2011, while coal power decreased by 215.2 billion kilowatt hours. Our past success gives hope that fracking could have an even bigger impact on reducing China's emissions.
Massive shale gas reserves
According to estimates from the U.S. Energy Information Administration, or EIA, China has 1,115 trillion cubic feet of shale gas reserves. That's nearly twice the shale gas reserve estimate for the U.S. Just for some context on how much gas we're talking about, 5 trillion cubic feet of natural gas is enough to meet the energy needs of about 5 million American homes for 15 years.
The problem so far is that China is having trouble actually producing those reserves. That said, China is slowly starting to make some progress as shale gas production surged five-fold last year to 200 million cubic meters. The country hopes to push its production up to 6.5 billion cubic meters by 2015. However, that's still well off the 7.85 trillion cubic feet or 222 billion cubic meters that the U.S. produced in 2011 according to the EIA.
Looking for help
China is taking a dual approach to finding the key to unlock its massive reserves. Many Chinese energy companies have entered into joint ventures with U.S. producers to fund drilling in America. In one sense, China took advantage of shale gas producers that were strapped for cash to fund aggressive drilling programs. However, these deals also enabled Chinese companies to gain firsthand knowledge of how to use fracking to unlock shale gas reservoirs.
In addition to that, Chinese energy companies also signed shale exploration deals with U.S.-based producers like ConocoPhillips (NYSE: COP) and ExxonMobil (NYSE: XOM) in hopes that the early insight both gained in unlocking American shale plays can work over in China as well. Both companies were early to acquire shale gas players as ConocoPhillips snapped up Burlington Resources and ExxonMobil picked up XTO Energy.
Both are now using that firsthand knowledge to try to unlock China's vast shale reserves. ConocoPhillips has two joint study agreements with Chinese national oil companies in the Sichuan Basin. Its agreement with Sinopec covers about 1 million acres while its deal with PetroChina covers half a million acres.
ExxonMobil also has an agreement with Sinopec in the Sichuan Basin. Its agreement covers a 1,407-square mile area. Still, it's finding these rocks to be tough to frack with the same hydraulic fracturing techniques that are currently working in the U.S. The company believes that the industry will need to invest heavily to develop new fracking technologies to unlock these Chinese shale plays.
The water issue
ExxonMobil is running up against two major issues. Chinese shale formations are much deeper than those in the U.S. and most are in remote areas that lack water and infrastructure. Because hydraulic fracturing requires millions of gallons of water per well, this is a real problem. However, oil-field service companies like Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI) could turn out to hold the keys to that problem. Both are working on water recycling technologies that could alleviate some of the water problems.
Halliburton will soon be running a test program in the Bakken Shale of North Dakota on its H2O Forward service. The project will use recycled flowback fluid and produced water to frack wells. If successful this service could be used in other basins as well as eventually exported to places like China. Meanwhile, Baker Hughes is working on its own solution called H2prO.
With massive resources and a real need to clean up its emissions, China simply has to figure out how to frack its shale so that it can produce cleaner natural gas. While it still has a lot of work to do, once China does crack the code it should be able to ramp up its production rather quickly. While it might not meet its ambitious target to produce 60 billion-100 billion cubic meters of shale gas by 2020, as U.S. shale gas companies have demonstrated, once the code is cracked it's quite easy to "manufacture" gas by using multi-well pads and quick turnaround times.
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