How long will the Chinese put up with coal?

Exxon Mobil today issued an impressive second-quarter earnings report, with much of the good news again involving a surge in liquid natural gas production from Qatar. It's further proof that Exxon -- along with the rest of Big Oil -- has made a big bet that natural gas will be a growth engine for the company in the absence of opportunities in oil. Fast-growing Asia is the big market, with China leading the way.

A big bet, yes -- but is it a smart one? As the Financial Times ' Carola Hoyos writes, a private report issued a few days ago by Wood MacKenzie, an industry consulting firm, suggests that the gamble may pay off for only the next decade, much shorter than the 30- to 40-year investment timeline typical for Big Oil. If the report is correct in this respect -- and I have my doubts -- the oil multinationals must find another way to survive in the transforming world of energy.

Woodmac's report concludes that China's appetite for LNG will swell for the next decade, requiring the gas equivalent of 380,000 barrels a day of oil imports, but that this demand will be cut in half in the 2020s. Why? Woodmac doesn't say China will give up on gas, but rather that it's going to develop its own domestic resources -- specifically shale gas, using hydro-fracturing technology invented in the United States. In this scenario, China's gas supplants its use of industrial oil, but not too much coal, which will continue to be far and away the fuel of choice for the production of electricity.

I spoke with Gavin Thomson, the author of the Woodmac report, who said that it's based on a presumption that natural gas-fired electric plants will replace coal-fired ones in coastal areas -- but that's about it. He sees gas comprising 5 percent of China's overall power-production mix. In a speech over at the Center for Strategic and International Studies, Fereidun Fesharaki basically agreed with the assumption that big shale gas use, along with more coal consumption, is ahead for China.

Where I harbor doubts is this scenario's implication -- phrased diplomatically -- of gross short-sightedness on the part of the Chinese government. That is, it suggests that Beijing doesn't notice that its rising use of coal is causing intense local pollution, and that the Chinese population is going to continue to tolerate it.

But that isn't the case. As Andrew Jacobs wrote in the New York Times yesterday, China's Ministry of Environmental Protection itself reports that acid rain has become a problem in 200 of 440 cities. "China is still facing a grave situation in fighting pollution," ministry spokesman Tao Detian said in a widely quoted statement posted on the ministry's website. Certainly this attentiveness is rooted to some degree in an increasing restiveness on the part of ordinary Chinese toward the pollution.

But this reality isn't reflected in any of the forecasts I've seen of China's future coal use. It should be. There is at least a betting chance that China is going to undergo a far more massive than projected shift from coal- to natural gas-fired and nuclear plants over the next two decades.

And if that happens, Exxon -- with its big bet on Qatari LNG -- will still be in business.

Oilwatch Monthly July 2010Home construction fails to lift recovery