Shale gas moves to usurp king coal

Coal occupies an increasingly important position in Asia's economic and energy equations.

This is mostly due to growing demand from China and India. The International Energy Agency has forecast that China's coal demand will increase 70 per cent from 2009 to 3.71 billion metric tonnes by 2035, while India's demand will increase 188 per cent to 1.15 billion tonnes during the same period. Indeed, China imported 182.4 million metric tonnes of coal in 2011 (up 11 per cent from the year before), and India imported 118.4 million metric tonnes (up 7.6 per cent).

In response, Southeast Asia has bought in heavily in coal. Indonesia exported more than 312 million metric tonnes in 2011, compared to 56 million metric tonnes in 2000, and production is expected to top 332 million metric tonnes this year. Some of its provinces have become almost entirely dependent on coal. East Kalimantan earned around US$36.33 billion, or 95 per cent of its total 2011 export earnings from coal. The Indonesian central government itself took in a cool $6.6 billion in coal royalties in 2011.

Coal is important to Thailand too, despite its depleted reserves. Indeed, coal still accounts for about 20 per cent of its electricity generation, and Thai energy companies are seeking regional coal assets to meet domestic energy needs. Coal stalwart, Banpu via Indonesia subsidiary PT Indo Tambangraya Megah Tbk (ITM) operates six mining concessions across Kalimantan plus related infrastructure such as a loading port and electricity generator in Bontang, the island's coal hub.

PTT too has invested in Indonesian coal as part of its ambitious diversification efforts. Its Singapore-listed arm, Sarkari Resources, is engaged in thermal coal mining at Sebuku and Jembayan, also in Kalimantan.

But technological advances elsewhere threaten the march of coal in Southeast Asia. The biggest is the advent of shale gas.

Shale gas is natural gas formed and trapped in fine-grained sedimentary rocks found quite deep in the earth, which meant that it was previously difficult to extract. The last couple of years, however, have seen a dramatic increase in the usage of the hydraulic fracturing, or "fracking", process, whereby shale gas is extracted by using water to break the rock and release the gas. This process means that shale gas is now more commercially and logistically viable than before, and also coincides nicely with increased global demand for natural gas as a cleaner alternative to coal.

The US Energy Information Administration estimates that China has some 1,275 trillion cubic feet of shale gas reserves, while surveys by various Indian agencies estimate that the country holds anywhere between 300 trillion and 2,100 trillion cubic feet. America sits atop some 860 trillion cubic feet of recoverable shale gas. China's entire explorable reserves would meet its gas needs for the next two centuries.

America has embraced shale gas with a vengeance. Despite ongoing concerns about the cleanliness of fracking, some 20,000 wells have been drilled in the United States: the jobs that it creates may simply be too good to pass up.

Indeed, coal consumption is rapidly contracting in America: coal's share of its electricity generation is expected to fall below 40 per cent this year, the lowest since 1949. As Market Watch reported: "US coal producers had seen their stocks plummet recently as the companies have battled rising costs, increased environmental oversight and stiffer competition from cleaner-burning and sometimes cheaper natural gas. Coal is expected to cede more market share to natural gas, in what analysts say could be a permanent shift."

"The rest" are getting in on the act. China's Sinopec in June began drilling the first of nine upcoming shale gas wells in Chongqing, and the government is planning to create an annual production target of 6.5 billion cubic metres by 2015. India will begin its inaugural bidding for shale-gas licences in December, with foreign companies being allowed to participate. Its Oil & Natural Gas Corp (ONGC) in March inked a deal with Conoco Phillips to explore shale gas resources in India and North America.

Even Southeast Asia has been smitten: Malaysia's Petronas has put in a $5.5 billion for Canada's Progress Energy Resources, whose landholdings in British Columbia are said to be rich in shale gas.

Indonesia in April grantedfour new shale gas study projects, with authorities claiming that the republic has hypothetical resources of 574 trillion cubic feet.

The rise of shale gas has crucial implications for Southeast Asia, and Thailand. The obvious loser would of course be Indonesian coal, and this means that the Thai companies who have invested in it may no longer find it as attractive as before. At the same time, a continued reliance on coal for energy may no longer be politically viable given the growing environmental consciousness across Southeast Asia.

Thailand's leaders have always shown foresight and a capacity for lateral thinking. Their next challenge may very well be to rework the Kingdom's energy policy in light of the challenges, and opportunities posed by shale gas.

Karim Raslan is a regional columnist who divides his time between Malaysia and Indonesia.