Between Fragmentation and Harmony. The Political Economy of Shale Gas in China

FNI Report 15/2014. Lysaker, FNI, 2014, 53 p.

The aim of this paper is to explore the evolution of government priorities, strategies and policies towards the Chinese shale gas industry in the context of general theories on policy making in China’s energy sector. The report begins with a review of the body of theory related to policy processes in the Chinese energy sector, which describes China’s energy sector as consisting of a fragmented set of institutions, where changes are incremental and policy making is disjointed. Flowing from this body of work, the paper draws on Chinese official documents and interviews with industry insiders to expose an inconsistency between the official strategy for development, market structure and entrenched interests in maintaining the current system. It argues that the increasing urgency of limiting coal consumption while expanding domestic natural gas production has created political impetus behind utilizing shale gas resources. Moreover, a consensus has emerged among the most important regulatory institutions in favor of a development strategy assimilating the US experience, consisting of direct government support through subsidies and R&D programs, and market deregulation and restructuring in favor of private and foreign access. However, there is a long way to og before this initiative can become reality. First of all, due to material constraints, including complex geological characteristics and water scarcity, shale gas extraction on the Chinese continental shelf has been more technologically intensive, time consuming and expensive than the case in other more favorable areas. Second, the chosen strategy faces many institutional constraints, including a heavily regulated pricing structure, a monopolized natural gas industry, lacking environmental regulation and a failure to incentivize foreign cooperation. The report concludes that despite coordination of priorities and strategy among energy regulators, they have so far been unable to overcome these institutional constraints, in part due to the strong dominance of the Chinese national oil and gas companies and their entrenched interest in the status quo. Hence, this study argues that the emerging shale gas industry generally supports the assumption that Chinese energy politics are fragmented, but that the most important disjunct exists between the regulators and the NOCs, rather than within the bureaucracy in charge of managing shale gas.