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Australia's Curtis Island, 300 miles northwest of Brisbane, is known for the countless birds that make their home in the island's mangrove swamps and gum-tree forests. For the Chinese government, Curtis Island is on the map for another reason: It is the proposed home for a new plant to liquefy natural gas taken from coal mines in the area. The developer of the plant, Brisbane-based Arrow Energy, is now co-owned by PetroChina (PTR), the state-owned energy company, which joined with Royal Dutch Shell (RDS.A) to complete a $3.2 billion takeover of Arrow in August.
Until recently the Chinese have mostly tried to buy up conventional deposits of oil and gas around the world. Arrow Energy focuses on so-called unconventional reserves—in this case coal-bed methane, a coal by-product that is frequently difficult to mine. On Curtis Island, Arrow is hoping to take the coal-bed gas it has mined from the nearby mainland and cool it to about -260F, which will liquefy the gas and make it easier to transport by ship to China.
As PetroChina Chairman Jiang Jiemin said when the acquisition was announced, the Chinese giant is counting on Arrow to provide some of the expertise needed to develop such unconventional gas reserves back in China. The nation has only 2.46 trillion cubic meters of conventional natural gas reserves (conventional gas reserves are found between rock formations). China, however, may have more than 10 times that amount in unconventional gas deposits: China National Petroleum, China's largest energy supplier, puts the number as high as 30 trillion cubic meters. That 30 trillion also includes gas trapped in shale, which can be flushed to the surface through injection of water at high pressures.
Natural gas releases 44 percent less carbon dioxide than coal, China's top source of energy today, so switching to gas could help clear the country's smog-filled skies. Beijing policymakers want China to triple the amount of gas the country consumes to a targeted 10 percent of energy needs by the end of the decade.
To help reach that goal, China has to tap all that unconventional gas. Although the government has established ambitious production targets for unconventional gas inside China, the industry's performance has been underwhelming. China's "technology is relatively backward when it comes to developing unconventional resources," says Wang Aochao, head of China energy research at UOB-Kay Hian in Shanghai. The Chinese lag behind Western industry in drilling and extraction techniques for coal-bed and shale gas.
That's where foreign companies come in. Last year, Royal Dutch Shell signed an agreement with PetroChina to explore for unconventional gas in southwestern China. If projects there show promise, the Anglo-Dutch energy giant may invest $1 billion annually over the next five to seven years, says Shell Chief Financial Officer Simon Henry. In May the Chinese government announced a 25 percent increase in the price of domestically produced gas. The jump reflects the higher cost of producing hard-to-extract unconventional gas and creates more incentives for companies to expand exploration efforts.
The bottom line: China's conventional reserves of natural gas are small. Its unconventional reserves may be more than 10 times greater.