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Russia's President Vladimir Putin (L) applauds during an agreement signing ceremony in Shanghai on May 21, 2014, with Gazprom CEO Alexei Miller (C) and Chinese state energy giant CNPC Chairman Zhou Jiping (R). (ALEXEY DRUZHININ/AFP/Getty Images)

China Needs the U.S. as Energy Partner

Arthur Herman

Commentary on last month’s Russian-Chinese energy deal to ship 38 billion cubic meters of natural gas annually from East Siberia to China has focused on its benefits for China. Yet Beijing may come to regret the deal, especially when some superior options exist directly under its feet.

Granted, northeast China needs gas imports, and other sources such as liquid natural gas would be expensive compared with piped gas from Siberia. And China’s demand for natural gas is going to grow rapidly in the next couple decades—far faster than can be met with non-Russian sources such as Australia.

Even so, the $400 billion Siberian pipeline that China is now obligated to help finance won’t be usable for four years. And by 2020 it will meet no more than 10% of the country’s needs.

The real beneficiaries of the Shanghai deal are Vladimir Putin and his state-owned Gazprom. Gas flowing through the Siberian pipeline will also be available for sale to other Asian countries at a considerable discount to what they pay for liquid natural gas. The deal offers insurance if Europe cuts back on Russian gas imports in the aftermath of the Ukraine crisis. Analysts at Wood MacKenzie liken the deal to finding “a new Europe” for Gazprom.

That should give the Chinese additional pause. The rest of the world is learning that relying on Russia for natural gas can be a very bad idea—almost as bad as depending on oil shipped through the Iran-dominated Straits of Hormuz, as China does now. Yet China’s energy demands are inexorable. Already the world’s largest energy consumer, it will see demand surge again in the next two decades, including for natural gas.

A better idea is for China to crack open shale oil and gas reserves at home, which are enormous. The U.S. Energy Information Administration estimates that Chinese gas reserves could be almost one and a half times those of the United States. Yet to date China has dug fewer than 200 shale-gas wells, compared to 40,000 dug in the U.S.

Why hasn’t China seen the kind of shale revolution that has turned the U.S. into the world’s biggest natural gas producer, and will make it the biggest oil producer by 2020?

Part of the problem is geology. China’s shale is heavily mixed with clay, unlike the brittle bedrock that surrounds American shale. China’s is also buried deeper, and some deposits may contain lethal contaminates like hydrogen sulfide.

There’s also geography. China’s biggest shale gas fields are in Sichuan province, which is densely populated, unlike North Dakota or West Texas. And Sichuan can’t spare the tremendous amount of water that American-style fracking demands.

But the biggest problem is the Chinese government. The country’s major energy companies are state-owned and naturally get most contracts whether they have the expertise or not. There is little opportunity for homegrown startups to introduce innovation that would address the technical obstacles. And given China’s legal system, there are no guarantees that an individual investor in such projects would get his money back.

So even though China has set a 2015 target for shale gas extraction of 6.5 billion cubic meters—a tiny fraction of what the U.S. extracts every year—it seems unlikely they will come close to meeting it. At one gas site auction in late 2012, not one of the 16 companies bidding had ever drilled a gas well.

There is one place where China could find the expertise to open its gas potential: the United States. China has already turned to giants such as Shell for help—and joint ventured with companies such as FTS International with experience in fracking—but only U.S. companies are truly poised to solve China’s issues.

Houston-based eCorp, for example, has developed a technology for fracking shale wells with liquid propane instead of water mixed with chemicals. Unlike conventional fracking, the process produces no waste because the propane goes into the pipeline along with the gas.

But for China to tap sufficient foreign expertise would require some rethinking—namely to begin viewing foreign entrepreneurs not as profiteers but as partners. Such a change might also encourage Beijing to see the U.S. less as a geopolitical and economic rival, and more as a potential partner in solving its biggest energy needs.

China’s long-term economic and energy security are at stake. Betting on help from the U.S. seems far wiser than relying on a Siberian pipeline with Vladimir Putin’s hand on the spigot.

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