Almost from day one here, I've challenged conventional wisdom that UK and world energy prices inevitably rise because of Chinese demand. The narrative underpinned the economics of UK/EU energy policy: Demand for scarce LNG would push up prices in Europe to levels that made renewables, nuclear and Carbon Capture look attractive, ignoring that mass roll-out of any of them appears physically and financially unlikely.

Even before shale there were a few holes in the theory:

1.  China is building new infrastructure, by definition the most efficient.

China will plough $372 billion into energy conservation projects and anti-pollution measures over the next three-and-a-half years, part of a drive to cut energy consumption by 300 million tonnes of standard coal

2.  Chinese politics learn from the west. After Earth Day, US and EU governments used a 'green' agenda to co-opt domestic opposition. They say that all politics is local, and the Chinese understand that as the middle class learnt to get rich was glorious the more important the local environment became. Giving people clean air and water instead of economic equality or true democracy will work in China as it has in the West. Cleaning up the air makes it seem as if the system works while nothing changes under the surface.

3. China has the potential for a big conventional gas market using Turkmen, Kazakh, Russian, Burmese and domestic CBM sources, all cheaper than LNG.

Another part of the equation is EU energy policy positing an 80% reduction in CO2 levels as necessary because non OECD demand, centred in China would be coal powered. We have to be nobly clean because they werre going to be ignobly dirty since coal would be forever the cheapest fuel.

Global emissions of carbon dioxide (CO2) increased by 3% in 2011, reaching an all-time high of 34 billion tonnes in 2011. With a decrease in 2008 and a 5% surge in 2010, the past decade saw an average annual increase of 2.7%. The top 5 emitters are China (29%), the United States (16%), the European Union (EU27) (11%), India (6%) and the Russian Federation (5%), followed by Japan (4%).

The fact that global emissions continued this historical growth trend in 2011 seems remarkable at first sight, considering that in many countries that belong to the Organisation for Economic Co-operation and Development (OECD), CO2 emissions in fact decreased – in the European Union by 3%, in the United States by 2% and in Japan by 2% – mainly due to weak economic conditions in many countries, mild winter weather in several countries and high oil prices. More important, however, is that CO2 emissions from OECD countries now account for only one third of global emissions – the same share as that of China and India, where emissions increased by 9% and 6%, respectively, in 2011.

In the 20 years since 1992, when the United Nations (UN) Earth Summit was held in Rio de Janeiro, an increase of 50% in global anthropogenic CO2 emissions was observed. This growth in emissions caused an increase of 10% in the CO2 concentration in the atmosphere, from 356 to 392 parts per million (ppm). Since 2000, an estimated total of 420 billion tonnes CO2 was cumulatively emitted due to human activities (including deforestation). Scientific literature suggests that limiting average global temperature rise to two degrees Celsius above pre-industrial levels – the target internationally adopted in UN climate negotiations – is possible if cumulative emissions in the 2000–2050 period do not exceed 1,000 to 1,500 billion tonnes CO2. If the current global increase in CO2 emissions continues, cumulative emissions will surpass this total within the next two decades.  

The operative word in the last sentence is "if".  But the story of shale has been how a whole raft of previously outrageous far fetched possibilites rapidly toppled conventional wisdom. Trends such as shale gas, US LNG exports and as now US energy independence via shale oil moved rapidly from completely unthinkable to entirely plausible at amazing speed.The big news in the US this year has been a realisation that shale gas is going to be permanently cheap enough to replace coal, with the fortunate by-product of significant CO2 reductions. Other energy players had already decided where reductions were going to come from depending on their favourite technology. All of the proposals made varying degrees of sense in a carbon constrained world.   

But what if China's coal demand can be reduced by using shale gas? Alan Riley, friend of this blog and sometime co-conspirator wrote this Op-Ed  last month in the NYT. In case you missed it during the dog days:

The battle against runaway climate change is being lost. The green movement and the energy industry — while engaged in a furious debate on issues from nuclear power to oil sands — are missing the bigger picture.

There is little recognition by either side that current policies to reduce carbon dioxide emissions are inadequate for dealing with the threat that they pose. It is the coal-fueled growth of countries like China and India that generates much of these emissions. Unless a cheap, rapidly deployable substitute fuel is found for coal, then it will be next to impossible to safely rein in rising carbon dioxide levels around the world.

 At the same time a big scientific gun, (and a recent convert from climate skepticsim) is saying the same. The book is available end of September in the UK.

In his new book, Energy For Future Presidents, U.S. author Richard Muller - a physicist at the University of California at Berkeley - makes the highly sensible argument that the only way to slash global carbon emissions is to target China's coal-fired power plants, and encourage a switchover to natural gas.

But is that realistic?  "The Rise of China and it's Energy Implications" from Rice University, like all good academic studies has a variety of reference cases.  The HIgh China Shale Reference Case should scare the LNG industry silly in that among other things, it see substantial Chinese shale exports to Korea,  currently the world's number two export market.

This Baker Institute study on the role of China in the future of global gas markets has examined some of the consequences of rising supplies of natural gas from shale in China and lower than expected demand for natural gas in China. The study finds that development of shale gas resources in China will have multiple beneficial effects for energy security in China, and in Asia more generally. In addition, a reduction in import dependence in China has a ripple effect that results in lower prices in Europe and the United States as well as in Asia. 

 The study is academic and it's also 9 months old, an age in shale terms. But an August BOA/Merril analysis not in the public domain sounds very bullish on China shale:

 The consensus understanding of Chinese gas supply and demand is that, by 2020, nearly half the demand would need to be filled by imports. In addition to all

the contracts signed, China might need another 62-112bcm in additional gas from imports to fulfill demand in 2020. In the last few years, the higher cost of imports and continuous delay for the confirmation of a Chinese/Russian gas deal, has pushed China to develop alternative gas solutions.

With the emergence of unconventional gas, the picture might be subject to substantial changes. In fact, in the last 12 months, the Chinese government has published a different policy document to outline the development of unconventional gas:

1. Shale gas production volume could be about 6bcm in 2015, and 60-100bcm in 2020.

2. Various provincial governments have announced a 100bcm CTG gas production project, although we expect about 20-30bcm will be finally

realized.

3. The government also announced a production target of 30bcm of CBM in 2015, and 50bcm in 2020.

 The Rice Study goes out to 2040 which is valuable because today in the EU/UK we have the policy based on far lower carbon emissions by 2050.  We now see at least the potential to cut CO2 instead of talking about it. We can see 30 to 40% cuts by 2030 via efficiency, shale replacing coal and aggressive replacement of diesel with natural gas in trucking and shipping. If we can replicate that globally, we are likely to actually exceed climate targets on a global basis. But talking about carbon reductions has been a major job creation engine in the green movement.  Do a search and see how many Green Business sites turn up.  Remember No Hot Air means no CO2 as well as no meaningless rhetoric.  

So there we have it. If we can replicate the US shale experience and CO2 reductiions worldwide, the positive impacts are manifold and effectively solve the climate crisis. Depending on point of view, that is wonderful for most, threatening to some or disastrous to the disappointed.

 I'll expand on this later but many shale opponents and green NGOs are in various stages of what could be described as Cognitive Dissonance: ignorance, denial, anger and acceptance. To many opponents prophecy has failed. This doesnt' mean that they are bad people, just that the facts have changed and they  remain in the anger stage:  they lash out, they search for any excuse to shore up beliefs and over-emphasie the potential for risk via catastrophic thinking. But those syndromes can at least be addressed, as opposed to the commercial elements from profit making companies who find that not so much their world view, but simply their business model has changed completely. Any business that denies reality and refuses to innovate won't be around for long, but they often try and take a lot of financial and human capital down with them. Gazprom seems to be learning that lesson at long last, and hopefully that new reality will finally take hold at their various satraps.

 

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