Exporting the Shale Revolution to the Middle Kingdom: A Strategic Role for Shale Gas Cooperation in the Sino-American Relationship

Abstract

Combined application of hydraulic fracturing (fracking) & horizontal drilling in the last six years has enabled American producers to extract natural gas from low-permeability geological formations such as shale. Reverberations of this shale gas-led U.S. energy renaissance can be felt across the nation, providing direct domestic employment and the cheaper reliable energy to revitalize a stagnant industrial/manufacturing sector facing tough global competition. The PRC may offer the best chance to become the next frontier for export of the shale gas revolution. According to an EIA appraisal, China has the largest technically recoverable gas resources in the world—roughly 2.5 times U.S. shale gas reserves. Shale gas now occupies a vital strategic niche within China’s larger energy portfolio. Successful development of its domestic shale basins might address certain imperatives facing the new Bejing regime: (1) the pivot toward greater natural gas usage in China, requiring expensive imports of gas to meet ever-increasing demand; (2) the threat of catastrophic environmental consequences has compelled Beijing to yield to domestic & international pressure to pursue lower-carbon energy solutions, including use of cleaner-burning shale gas; (3) ongoing energy security anxieties, deemed an existential threat to the regime’s survival. Despite pilots and experiments intended to incentivize shale E&P, drilling has been hampered by complex geology and inexperience with unconventional plays. The present Thesis investigates whether America can and should use shale gas development assistance as a strategic lever in the U.S.-China relationship. Given America’s proven record developing its own shale gas industry and the major challenges facing the Chinese, shale gas development on China’s mainland might offer an opportunity for partnership, matching U.S. best-in-class capabilities with Chinese needs, and in the process, advancing core objectives of both nations. The U.S. Government and American private industry can provide comprehensive assistance, including: technological training, technical expertise, environmental regulatory insights, and green technology. There may be opportunity to advise the Chinese on more fundamental issues to promote greater competition, such as energy market reform & establishing open pipeline access. Successful development of China’s shale gas industry may: (1) further American environmental goals, ensuring that the PRC fuels economic growth in a less carbon-intensive, more responsible manner, with comparatively lesser impact upon the global community, (2) involve American firms in the growth of China’s energy sector—a key economic benefit, and in the process, encourage the reform and opening of Chinese markets. With respect to U.S. geostrategic/security objectives, it is difficult to determine the extent to which a domestic supply of shale gas will actually curb China’s energy-insecurity driven behavior. Sino- American cooperation in shale development poses little evident risk to America’s global competitiveness, including current advantages in manufacturing & industry, and prospects for U.S. LNG exports are unlikely to be significantly affected by the availability of Chinese shale gas. This Thesis finds that, because China needs shale gas development assistance that the United States can provide, such assistance, given its singular nature and profound strategic value to the Chinese, indeed represents an important strategic lever for America to employ, in order to achieve significant objectives in the U.S.-China relationship, perhaps the most important bilateral relationship of the twenty-first century. Further, core American interests are served by proceeding with this assistance.