fracking changes everything

The implications of the shale energy revolution in the United States， which has helped it surpass Russia to become the world’s largest producer of natural gas in 2009 and may result in the displacement of Saudi Arabia as the world’s largest oil producer by 2020， are already being felt in China.

Ten years ago， Chinese oil executives regarded the international mergers and acquisitions （M&A） landscape to be rather bleak. They felt disadvantaged by their relatively late arrival to cross-border M&A. In their view， the best assets were in the hands of foreign governments that did not allow foreign equity participation or the major international oil companies.

Consequently， they were largely left with higher-quality assets in higher-risk countries or lower-quality assets in lower-risk countries. As former CEO of China National Offshore Oil Corporation（CNOOC） Fu Chengyu observed in 2004， “It’s actually not easy for us to find projects. The world oil industry has a 100 year history. The good projects are already taken.”

Today， Chinese oil executives are singing a different tune for two reasons. The US oil and natural gas boom has created investment opportunities in the United States for China’s national oil companies （NOCs）. Since 2010， Chinese NOCs have spent more than US$10 billion to acquire upstream assets in the US， most of which has been spent on unconventional projects.

The International Energy Agency’s？World Energy Outlook 2012 shows that in 2035， the US will be importing just 100，000 barrels of oil per day from the Middle East， while China will be importing 6.7 million. As a result， analysts in Beijing， like their counterparts in Washington and other world capitals， are debating whether declining US oil imports from the Persian Gulf， combined with budgetary woes， will prompt Washington to substantially reduce its military commitment in the region.

The Chinese have also started to think about what steps China and other major Asian buyers of Persian Gulf oil might eventually take to help ensure the uninterrupted flow of oil from the Persian Gulf.

The US shale energy revolution has also been bad news for Russia. Not only is demand for natural gas growing slowly in its largest customer， the European Union， but Europeans now have alternatives to Russian pipeline gas in the form of liquefied natural gas （LNG） originally intended for the United States.

Consequently， China， where demand for natural gas is surging， looms ever larger as a source of future security of demand for Russia， a fact not lost on the Chinese. China and Russia have been negotiating a cross-border natural gas pipeline since the 1990s but have been deadlocked on the price for several years.

China has considerable shale gas resources at least on paper. According to the US Energy Information Administration， China’s technically recoverable shale gas resources are the largest in the world （and almost 50 percent greater than those of the US）， and its technically recoverable shale oil resources are the world’s third largest （behind Russia and the US）. Moreover， three of China’s geological basins appear to contain marine shale， which is more easily fracked than non-marine shale.

However， there are several above-ground challenges to the rapid development of China’s shale resources， the most formidable of which is the structure of China’s oil industry. The shale revolution in the United States was launched by a large number of small independent operators driven by a desire to strike it rich.？In contrast， China’s onshore oil industry is dominated by the political interests of two State-owned behemoths， the China National Petroleum Corporation （CNPC） and Sinopec， which are motivated by political factors beyond mere greed.