Summary
The announcement of hydrate (a form of frozen methane) discovery in Qinghai province aroused quite a bit of attention in China. In view of China's poor natural gas reserve and the increasing role of non-coal based fuel, it is not difficult to see why the Chinese are so excited about the find. As China's energy sources depend heavily on its coal reserve and oil/gas imports, there is speculation that the hydrate discovery may change the supply mix and cause a shift in its energy strategy.
Analysis
While the huge hydrate discovery in China's Qinghai province, a remote region bordering with Tibet, received relatively little attention by foreign media, it had aroused much excitement in China's energy sector. The announcement was even included in a basket of good news releases just before the October 1 National Day.
Hydrate is a form of frozen methane and water normally found in offshore seabed and near arctic regions. China's discovery is one of first in the world that hydrate is found in such a low latitude. Geologists in China's Ministry of Natural Resources estimated that Qinghai province's permafrost region may contain hydrate up to 25% of China's total terrestrial hydrate reserve of 35 billion ton of oil equivalent, enough for 90 years of consumption. The recent find of hydrate in a relative shallow coal layer of 130-300 meter means that mining would be less difficult and more economic than that of offshore drilling.
As China's energy sources are mainly from its coal reserve, and oil and gas import from Russia and Central Asia, the huge hydrate find can supplement China's poor natural gas reserve (only 0.4%) and diversify its energy mix to provide a cleaner fuel for power generation and transportation.
To reduce the demand on oil for transportation, China has invested heavily on electric vehicle to shift fuel source to coal and hydro based electricity. There is also an accelerated effort to develop coal gasification technologies to provide a liquid or gas fuel for transportation use. The discovery of gas hydrate would help China to wean itself from oil and buy some time to develop a domestic nuclear and renewable energy industry to meet the energy demand beyond 2020.
Mining hydrate and developing the necessary infrastructure to integrate it as a part of energy mix will take time. It is too early to say that China will modify its energy strategy. Perhaps some near term actions to watch would be whether China will built more gas pipe lines from the remote western region to the coastal load centers and investments in combustion gas turbine manufacture to build up its gas turbine generation fleet. However, with the signing of the Sino-Russian trade agreement on natural gas, it is expected that China will continue to rely heavily on Russia and the former soviet satellites as energy supply partners.
Frank Chu consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
