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The Combustible Ice Revolution
What will a new fossil fuel revolution bring about?
By Mei Xinyu | NO. 24 JUNE 15, 2017
Workers celebrate the successful trial extraction of methane hydrate in the Shenhu sea area of the South China Sea in May (XINHUA)

One of the world's largest reserves of fossil fuels—"combustible ice"—has come a step closer to commercial exploitation.

China's Ministry of Land and Resources (MLR) announced on June 2 that the country's trial mining of combustible ice in the Shenhu sea area of the South China Sea has maintained 22 days of continuous gas production. Following the success of the trial mining, China holds the record as the country with the longest run-time for maritime combustible ice mining in the world.

Combustible ice, technically known as methane hydrate or natural gas hydrate, is a frozen mixture of water and natural gas that can be found beneath seafloors, under Antarctic ice and inside Arctic permafrost. It can be lit on fire in its frozen state and is believed to comprise one of the world's most abundant fossil fuels.

The recent trial took place in the Shenhu sea area, about 320 kilometers southeast of Zhuhai City, Guangdong Province. Li Jinfa, Deputy Director of the MLR's China Geological Survey, said the trial produced an average of 8,350 cubic meters of gas with high purity each day. According to Li, the mining operation is safe and no environmental pollution has been caused.

Despite the need to address a series of technical problems, all available information indicates that widespread mining of combustible ice and possible commercial use of the resource may be not far off in the future—and China may be poised to take a leading position in this sector.

Reserves of combustible ice double the total amount of crude oil and natural gas available. As a result, once it becomes commercially viable to exploit the resource, it will have a profound impact on China and the world's energy industry. It may even surpass the shale gas revolution that has deeply changed the international energy market in recent times.

A drilling platform that extracts methane hydrate in the Shenhu sea area of the South China Sea in May (XINHUA)

Changing energy structures

The potential combustible ice revolution will first enhance China's negotiating power for natural gas imports, especially in negotiations for long-term contracts.

For China, expanding oil and gas imports from the United States has a strategic purpose. The Panama Canal expansion project completed in 2016 has enabled U.S.-produced crude oil and liquefied natural gas (LNG) to enter the East Asian market with more competitive prices. Expanding imports from the United States, a new natural gas global supplier, will help China bargain with its conventional suppliers.

In fact the East Asian gas premium is narrowing as LNG trade grows. What we need to do is to expand imports of LNG from the United States under favorable conditions in order to further reduce or ultimately diminish the East Asian gas premium.

Among the consensus on 10 issues reached by China and the United States in the 100-Day Action Plan of the China-U.S. Comprehensive Economic Dialogue released shortly before the Belt and Road Forum for International Cooperation was held in Beijing in May, the fourth clause roused much attention: "The United States welcomes China, as well as any of our trading partners, to receive imports of LNG from the United States. The United States treats China no less favorably than other non-free trade agreement (FTA) trade partners with regard to LNG export authorizations. Companies from China may proceed at any time to negotiate all types of contractual arrangement with U.S. LNG exporters, including long-term contracts, subject to the commercial considerations of the parties."

Admittedly, China's mining of combustible ice will not impose significant impact on the spot market, because it will take time to realize commercial-scale production of the resource. It will, nonetheless, affect negotiations of long-term contracts.

In the long term, the potential combustible ice revolution will make LNG more competitive than pipeline natural gas. The pipelines needed to transport natural gas involve huge amounts of fixed-assets investment and complicated cross-border operations. In addition, the pipelines are also easily affected by unpredictable risks in the countries they pass through. On the other hand, LNG doesn't involve cross-border construction and operations of infrastructure, and operations are more flexible, so the market size of LNG keeps growing at a faster pace than that of the overall natural gas market. Since most of global combustible ice resources are in the sea instead of on land, mining of the resource will mainly rely on shipping by LNG vessels instead of through pipelines.

In the overall energy market, the combustible ice has the potential to push up market shares of natural gas in the world and especially in China.

The percentage of natural gas consumption in China's energy mix is still far below the world average, but China has already become one of the world's top natural gas consumers. Industrial, residential and transportation-related natural gas consumptions are all on the rise. Furthermore, China's natural gas infrastructure is large enough to meet domestic demand and the country is able to assume a role as a natural gas trading center for East Asia.

Under these circumstances, gaining huge domestic exploitable resources of natural gas is likely to trigger a new round of explosive growth of natural gas consumption in China.

Affecting economic structures

Once commercial exploitation of the combustible ice begins, the competitiveness of China's eastern and southeastern coastal regions will be further intensified as they are capable of combining their more advanced industries with the new resource.

The combustible ice revolution will change the international economic structure in a similar way: Industrial powers will gain more advantages, while oil and gas exporting nations without strong manufacturing and modern service industries will be weakened. That is because most of the combustible ice resources are beneath the seafloor, and industrial powers have the capability to explore these resources. Traditional oil and natural gas exporting nations will hence lose their resource advantages against industrial countries.

Faced with such possible conditions, both oil and gas-producing regions in China and the world must be aware that once the combustible ice revolution takes place, they will lose their competitiveness and their economic power will be weakened if they still uphold policies featuring resource populism—a sentiment that's characterized by unreasonable overcharging of resources to foreign buyers and unfavorable treatment of foreign investors in resource-abundant countries. Therefore these regions and countries must abandon these policies and be prepared to address the challenges to come.

In the past decade of primary product market boom, resource populism prevailed in some traditional oil and gas-producing nations, but since global oil prices began to drop in the second half of 2014, these countries and regions have been gradually abandoned by investors. The possible combustible ice revolution might further intensify such pressure on those countries and regions.

The author is an op-ed contributor to Beijing Review and a researcher with the Chinese Academy of International Trade and Economic Cooperation

Copyedited by Bryan Michael Galvan

Comments to zhouxiaoyan@bjreview.com

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