Landlines, Leapfrogs and China's Energy Learning Curve

Eric Rosenbaum, CNBC.com
Monday, 3 Jun 2013 | 1:03 PM ET
Yanlian Oil Refinery
Frederic J. Brown | AFP | Getty Images
Yanlian Oil Refinery

When discussing economic and population growth in the developing world, a cellphone metaphor is often invoked: usage has expanded faster than emerging nations have been able to build out landline networks.

Leapfrogging legacy technology is a theme that resonates across many sectors in the developing world, as improvement in the quality of life worldwide is enabled by the latest innovations.

China now hopes to embrace this thinking in the realm of energy. As demand rises commensurate with its higher living standards, the "end of the landline" paradigm is being extended to unconventional oil and gas drilling.

In recent years, Chinese state-run oil companies CNOOC and Sinopec have completed a spate of multibillion-dollar joint ventures with leading North American shale drillers, including Chesapeake Energy and Devon Energy, as well as CNOOC's outright acquisition of Canada's Nexen for $15 billion.

(Read more: The Globalization of Energy Demand)

The deals could stand based solely on Chinese national oil companies' making sound investments for their portfolios. But they could prove more important to the country's dreams of fueling a shale boom and keeping up with its rising energy consumption—applying the technological innovations that have led to the era of U.S. energy independence to a potential unconventional oil and gas bonanza in China.

The U.S. Energy Information Administration has cited technically recoverable shale gas resource in China at 1,275 trillion cubic feet—more than in the U.S. and Canada combined.

While recoverable fossil fuel resource estimates are not the same as actual reserve estimates and should be thought of as the best scientific "guesswork"—two Chinese government agencies and the International Energy Agency offer different estimates of China's recoverable shale resource—China's not going to ignore the opportunity.

"Clearly the hope is that one can leapfrog the technology," said Robert Price, president of International Risk Strategies, which advises on oil and gas exploration and development, and spent decades studying the global energy market at the Energy Department and IEA.

The issue, Price said, is that "shale oil/gas extraction technologies are not as commoditized as cellphone tech."

(Read more: The Rising Irony of the Beyond OPEC Era)

China to Succeed in Shale Gas Production: Pro
David Hewitt, co-head of global oil and gas equity research at Credit Suisse, discusses shale potential in China. He believes the opportunity there could be twice that in the U.S.

In a sense, the landline and the leapfrog metaphor leads directly into another key feature of emerging world growth that applies to rising energy needs. The division between the technological "haves" and "have nots" that has become a globalization mantra is also a key feature of emerging-market efforts to repeat the U.S.'s success in tapping unconventional oil and gas.

"It's a big question mark," said Jane Nakano, a fellow at the Center for Strategic and International Studies.

The Chinese-U.S. joint ventures in shale drilling were not hostile investments. In fact, U.S. drillers needed cash that the Chinese were willing to provide, and there's a general recognition from deep-pocketed foreign entities that U.S. upstream is a good investment.

In addition, the innovations that drove U.S. drillers and oil service companies to success across the domestic shale plays are available in the market. Nakano said that while China can acquire the technology, it's the expertise of combining, applying and tweaking technologies for various shale basin requirements which the emerging nation can only learn by doing.

(Read more: Why We Need to Help China Frack)

"That's one of the biggest pieces of the puzzle China hopes to solve," she said.

David Victor, a professor in the School of International Relations and Pacific Studies at the University of California, San Diego, said, "The Chinese haven't gotten nearly as much knowledge from these Chesapeake-type deals as just putting money in."

According to a recent report from the Organization of Economic Coordination and Development, energy demand growth in China, India, Indonesia and the rest of the developing world will far outweigh any decline in consumption seen in Western countries and Japan.

China has pushed aggressively into coal-bed methane extraction (it has the third-largest resource base in the world, behind Russia and Canada), and continued efforts there could weigh against giving more attention to shale extraction.

Melissa Stark, who heads Accenture's clean-energy team within the energy industry consulting group, said no one is thinking that the Chinese shale boom will be realized tomorrow.

"It is a long-term commitment, 10-plus years," Stark said. "The ramp-up was quick [in the U.S.] once people figured it out, but it was a long time to figure out how to do it, and in every geography people will need to figure it out. The technology will be important.

"When I was in China—and I'm going again next week—we asked what could we do, and they said, 'do a geological survey and make it available,' " Stark said.

China has barely scraped the subsurface of the unconventional oil and gas world.

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