Drill, comrade, drill

Shale offers China exit from US dependency curse

China increasingly suffers from a historic American curse - an addiction to imported oil and gas. The experience of the United States, where booming shale output is curbing a longstanding reliance on foreign fuel, points to a solution. But it will require more than overcoming water shortages to emulate US success.

Since 2007, America has cut its imports of foreign crude by 40 per cent, or about five million barrels a day. It is also preparing to export natural gas. China is moving in the opposite direction. The Middle Kingdom now imports 57 per cent of its oil, up from 48 per cent five years ago. Some 22 per cent of its natural gas comes from abroad - 10 times more than in 2007.

Like America, China has the means to halt and potentially reverse this trend. The nation boasts the world's largest reserves of natural gas, more than twice as large as America's, adjusted for the size of its economy, according to a new US Department of Energy study. It also has about 32 billion barrels of shale oil, the third-largest endowment in the world.

China might like to emulate the US energy revolution, but Beijing labours under certain disadvantages. Its shale treasure tends to be buried under thicker layers of rock and often in remote or mountainous areas. That makes drilling costlier. A shortage of water - required in prodigious quantities for shale drilling - is also likely to hamper development.

Still, there are obstacles that Beijing can sweep away. Drillers in China are still compelled to sell natural gas at below-market prices and liberalisation has been gradual. This limits the risks explorers are willing to take. While the government has a monopoly on property rights, rules on licensing energy-rich land are fuzzy. Homegrown investors also fear heavy handed treatment by the government - such as the forced mergers in the Shanxi coal industry. Foreign investors, meanwhile, worry about theft of their intellectual property.

Removing these barriers to investment is China's best option to stem its import dependence, especially as resistance mounts overseas to its purchases of energy assets. The alternative is ever-greater reliance on foreign oil and gas.