Get fracking: how China is institutionally unprepared to handle the technological advances of a shale revolution.

• Author: Yuskaitis, Sarah

1. INTRODUCTION

   Asia now represents almost 30% of world merchandise trade, a rate that has met rapid growth in the last decade. (1) The region is faced with increasing demands for energy due to this development rate; and, as a result, countries like the People's Republic of China (China) now focus on securing a supply of energy to maintain this economic growth and development. (2) An economic and technological "revolution" looms on the horizon, and it exists in the form of unconventional gas. (3) The global energy market is now evolving and attracting new exploration and development as the search for coalbed methane and shale deposits continues. (4) China is one such environment promising to be rich in hydrocarbons and a potential goldmine for foreign investment. (5) Though the presence of unconventional gas has the potential to be lucrative, several hurdles in the region prevent this energy revolution's move from strategy into the realm of reality in China. (6)

   This Note will examine China's increasing demand for industrial energy against the backdrop of stripped coalmines and maturing oil fields. (7) Part II introduces the realities of China's energy sector characterized by a dependency on coal, consumption outweighing production, and the potential for vast hydrocarbons in the form of coalbed methane and shale gas. (8) Part III will discuss China's interest in creating a national policy of energy regulation and implementation of new techniques in the energy industry such as hydraulic fracturing (fracking). (9) Part III will also examine China's regulatory framework in the exploration of minerals, the mining rights of those minerals, and the transfer of those mineral rights. (10)

   Part IV of this Note will analyze the present uncertainty in the realm of hydrocarbons due to the existing regulatory framework and the need for China to attract foreign investment in unconventional gas development, in order to fill the void in technology, infrastructure, and accessibility. (11) Finally, Part V will conclude that the Chinese oil, gas, and mineral regulatory framework must be reformed in order to invite participation of private and foreign competition in the domestic market and ensure fair competition. (12) Without changes to the regulatory framework ensuring oversight over the exploitation, environmental protection mechanisms, and trade in shale gas development, it is unlikely that this shale gas revolution will successfully supply an answer to China's energy demand. (13)

2. THE CURRENT STATE OF AFFAIRS: INCREASING DEMAND AND THE NECESSITY OF DEVELOPMENT

   1. The Demand for Energy in China

      The center of global energy demand now exists in developing countries such as China. (14) Per-capita energy consumption levels in the nation of 1.3 billion people remain low; however, the prospect for economic growth, development in energy policy, and changes in economic structure and regulation fueled the rapid increase in Chinese energy demand over the last decade. (15) China's demand for energy consumption is forecasted to surge by 75% before 2035, the largest increase compared to any other country. (16)

      China surpassed the United States as the largest energy consumer in the world, and China plays an increasing role in global energy markets for oil, coal and natural gas demand. (17) The International Energy Agency (IEA) estimates that China will be the largest oil consumer in the world by 2035. (18) China alone accounts for 54% of the entire net increase in coal demand. (19) Additionally, China's gas use will increase rapidly in industry, aiding the 43% increase in demand of natural gas in developing Asia. (20) While global, long-term natural gas demand is projected to increase and play a critical role in satisfying global energy demands, China's natural gas demand is estimated to account for more than one-fifth of this increase in global demand by 2035. (21) It is projected that over the next twenty years, China's gas will double its market share as two-thirds of energy growth will have to be met by electricity. (22)

      1. China's Current Rates of Energy Production and Import Rates of Oil and Gas

      China faces the dilemma of mature oil fields coupled with growing energy demand, forcing it to meet demands through imports and Chinese energy companies to focus on developing untapped reserves in the western interior provinces and offshore fields. (23) China's largest oil fields have reached maturity, resulting in a peak of oil production. (24) China currently produces 3.8 million barrels per day (mb/d) of oil, a number that will remain steady through 2015 until resource depletion sets in, resulting in a steady decline in production. (25) China is already the largest importer of oil surpassing the United States in September 2013, and it is believed that this trend will continue. (26) The IEA further speculates that China will become the world's biggest spender on both oil and natural gas imports before 2025. (27)

   2. Necessity of Development in China

      China has expressed the strategic weakness attributed to importing 6.3 mb/d of oil in order to fill the void between China's production of energy and China's consumption of energy. (28) China, in response to this void, has lofty shale output target goals for 2015. (29) Through the Ministry of Land and Resources (MLR), China aspires to reach a production goal of at least 15 billion cubic meters (bcm) of shale gas annually by 2020. (30) Over CNY7 billion (USD 1.13 billion) was invested by the end of 2012 to explore China's shale prospects. (31) The unconventional gas industry is in the beginning stages of development in China; however, the industry is stimulated with the existence of potential resources in coalbed methane and shale gas. (32)

      1. China's Potential Source of Hydrocarbons

         The U.S. Geological Survey estimates that the Asian and Pacific regions have a total mean undiscovered oil resource of forty-eight billion barrels of oil, with 33% of those resources in the China province. (33) Shale gas, however, is China's principal onshore energy prospect, with an estimated "technically recoverable" shale gas resource of 1115 trillion cubic feet (tcf). (34) Shale deposits are hydrocarbons between 8000 and 21,000 feet below the surface, requiring the recent technology of fracking to gain access to the reserves. (35)

      2. The Start of Unconventional Gas Exploration

         China prioritized domestic coal resources over natural gas in the 1990s because it was believed that natural gas was too expensive to exploit. (36) China is a leading consumer of coal in the global market, accounting for 43% of global coal demand. (37) Coal is most important to the industrial sector, which demands 60% of China's total coal use. (38)

         Coalbed methane is natural gas found in coal resources and the search for unconventional gas in China historically focused on coal resources. (39) Coalbed methane is the obvious place for China to begin exploring unconventional gas because of the vast coal resources and coal mining activities that are already well established in the country. (40) Unconventional gas output is projected to grow significantly in China; however, much uncertainty remains for the long-term development of unconventional resources. (41)

      3. Necessity of Technological Advancement

         China currently lacks the fracking technology necessary to recover and commercialize unconventional gas resources. (42) Though China is estimated to hold a significant source of hydrocarbons, access to these resources may prove difficult for China, because much of the unconventional gas is thought to lie in shale rock, requiring advanced technology for difficult extraction of shale gas deposits. (43) China is currently in a game of catch-up to gain the knowledge and technology necessary to support a substantial fracking development because of its previous focus on the importance of domestic coal resources. (44)

         As a means to rectify the problem regarding fracking technology, leading energy companies in China seek to form joint ventures with foreign energy companies to substitute this deficiency in technology. (45) China granted international oil companies greater access to offshore oil prospects and unconventional gas fields, mainly through production-sharing agreements and joint ventures. (46) Under the production-sharing agreements, Chinese national oil companies must hold the majority participating interest contract and become operators once development costs are recovered. (47) International oil companies exchange their technical expertise for partnership with Chinese national oil companies with an end goal of entrance into the Chinese markets. (48)

   3. The International Arena: A Demand for Reduced Carbon Emissions

      In addition to the domestic pressure of securing its energy sector, China faces international pressure to reduce carbon emissions. (49) International efforts aimed at environmental protection and reducing greenhouse gases are progressing on a multilateral level. (50) Coal consumption and production are leading factors to the level of carbon dioxide emissions. (51) China accounts for almost half of the world's coal consumption, the result of China leading the world in production, consumption, and importation in the global coal market. (52) As a result of Chinese coal consumption, China is also the world's leader in carbon dioxide emissions. (53)

      Over the last decade the central government has committed to reducing harmful toxins in the air with the Eleventh Five-Year Plan, the National Climate Change Program, and "China's Energy Conditions and Policies." (54) Currently, the country's Twelfth Five-Year Plan seeks to address the high coal consumption and high pollution rates by planning to reduce the carbon intensity by 17% by 2015. (55) China is moving toward an energy consumption control target in order to curb high levels of carbon intensity in the face of growing international pressure to reduce carbon dioxide and...