The guests at the compound that week were gearing up for another great leap: a push to export the United States' fracking boom to China's vast shale fields—and beyond. Attendees slid into black leather chairs behind glossy rosewood tables, facing a stage flanked by large projector screens. Chinese businessmen wore high-waist slacks with belts clasped over their bellies. I watched as one thumbed through business cards bearing the logos of Chevron, ConocoPhillips, Exxon Mobil, and Halliburton. Behind closed doors, a select group of Chinese and American officials and executives held a "senior VIP meeting." Outside, a troop of People's Liberation Army guards marched in tight formation.
The US-China Oil and Gas Industry Forum, sponsored by the US departments of Commerce and Energy, as well as China's National Energy Administration, has convened for the last 13 years. But the focus turned to shale gas in 2009, when President Obama and then-President Hu Jintao announced an agreement to develop China's immense resources. The partnership set the stage for companies in both countries to forge deals worth tens of billions of dollars.
Here at the 2013 conference, the first American to take the podium was Gary Locke, the US ambassador to China at the time. He wore a dark suit and a striped red-and-purple tie; his slick black hair glistened in the fluorescent light. "From Sichuan to Eagle Ford, Texas, from Bohai Bay to the Marcellus Shale in Pennsylvania and Ohio, US and Chinese companies are investing and working together to increase energy production in both countries," he proclaimed. US and Chinese companies were so tightly knit, Air China had recently started offering nonstop flights between Beijing and Houston, "making business trips much quicker for many of you gathered here."
The soft, static voice of a Chinese interpreter seeped from the headphones as young women in red vests quietly passed through each row, pausing to pour hot tea, their strides almost synchronized. Tiny plumes of steam arose from the teacups lining each table, like miniature smokestacks. It seemed fitting, because underlying all the talk of new energy was an urgency to wean China from its decades-long addiction to coal. Locke promised that shale gas would do just that: "We can make further strides to improve energy efficiency, produce cleaner energy, increase renewables, and increase supply," he asserted. "Unconventional gas, especially shale gas, is just the start."
THERE ARE TWO MAIN REASONS behind China's newfound zeal for gas. As Michael Liebreich, the founder of New Energy Finance, an energy market analytics firm now owned by Bloomberg LP, put it, "One is to feed the growth. There has to be energy and it has to be affordable in order to continue the growth machine. But the other one is that they've got to get off this coal."
Constituting a whopping 70 percent of China's energy supply, coal has allowed the country to become the world's second-largest economy in just a few decades. But burning coal has also caused irreparable damage to the environment and the health of China's citizens. City officials have been forced to shut down roads because drivers are blinded by soot and smog. China's Civil Aviation Administration ordered pilots to learn to land planes in low-visibility conditions to avoid flight delays and cancellations. Scientists wrote in the medical journal The Lancet that ambient particulate matter, generated mostly by cars and the country's 3,000 coal-fired power plants, killed 1.2 million Chinese people in 2010. In late 2013, an eight-year-old girl in Jiangsu Province was diagnosed with lung cancer; her doctor attributed it to air pollution. And earlier this year, scientists found that up to 24 percent of sulfate air pollutants—which contribute to smog and acid rain—in the western United States originated from Chinese factories manufacturing for export.
"The air quality in China has reached a kind of tipping point in the public consciousness," says Evan Osnos, The New Yorker's former China correspondent and author of Age of Ambition: Chasing Fortune, Truth, and Faith in the New China. "The entire Chinese political enterprise is founded on a bargain: We will make your lives better, if you'll allow us to stay in power." As more Chinese citizens demand clean air and water, China's leaders and foreign businessmen have taken drastic measures to get rid of pollution. Some local officials have tried to wash away soot by cloud seeding, a process in which chemicals are rocket-launched into clouds to make it rain. One company is developing a column of copper coils that will use electric charges to suck soot out of the air like a Hoover. Environmental officials in the northern city of Lanzhou attempted to level its surrounding mountains to let the wind blow the soot away—not to be confused with the city's actual plan to demolish 700 mountains in order to expand its footprint by roughly the area of Los Angeles.
But China's push to wean itself from coal has also triggered a rush to develop alternative power sources. The natural gas that lies deep within its shale formations is now a top contender. By current estimates from the US Energy Information Administration, China's shale gas resources are the largest in the world, 1.7 times those in the United States. So far, fewer than 200 wells have been drilled, but another 800 are expected by next year. By then, China aims to pump 230 billion cubic feet of natural gas annually from underground shale—enough to power every home in Chicago for two years. By 2020, the country expects to produce as much as 4.6 times that amount. It's moving at "Chinese speed," as one energy investment adviser put it—the United States took roughly twice as long to reach that volume.
Yet just as fracking technology has crossed over from the fields of Pennsylvania and Texas to the mountains of Sichuan, so have the questions about its risks and consequences. If fracking regulations in the United States are too weak, then in China the rules are practically nonexistent. Tian Qinghua, an environmental researcher at the Sichuan Academy of Environmental Sciences, fears that fracking operations in China will repeat a pattern he's seen before. "There's a phenomenon of 'pollute first, clean up later,'" he says. "History is repeating itself."
When my colleague James West and I traveled to China last September, it didn't take long to see the toll of the country's coal addiction: James had a burning cough by our second day. On a bullet train from Beijing to Xi'an (roughly the distance between San Francisco and Phoenix), we whizzed along at 150 miles per hour through some of China's most polluted pockets, including the northeastern city of Shijiazhuang, where the smog registers at emergency levels for a third of the year—twice as often as in Beijing. A thick miasma hung heavy, clinging so low to fields of corn that it was hard to see where the earth met the dark, gray sky. Every few minutes we passed another giant coal-fired power plant, its chimneys spewing a continual billow of thick, white smoke.
By the time of our trip, villagers living near fracking wells had already complained about the deafening noise of drilling machinery, the smell of gas fumes, and strange substances in their water. One night last April, in a small southwestern town called Jiaoshi, an explosion at a shale gas drilling rig rattled residents awake, triggering a huge fire and reportedly killing eight workers. In the wake of the accident, an official from the Ministry of Environmental Protection said, "The areas where shale gas is abundant in China are already ecologically fragile, crowded, and have sensitive groundwater. The impact cannot yet be estimated."
"WE CALL THIS SHALE COUNTY," the driver shouted to us in the backseat as he steered the four-wheel-drive SUV up a steep mountain in Sichuan Province. The clouds faded as we climbed, revealing a quilt of farmland dotted with pingfang, or flattop houses. We drove down a road lined with new hotels, small restaurants, and hardware stores—the markings of a boomtown. Roughly the size of Minnesota, the Sichuan Basin—where many of China's experimental fracking wells are located—is home to some 100 million people, many of them farmers. It's not the only part of China with shale gas, but fracking requires a lot of water, and with a subtropical climate and proximity to the mighty Yangtze River, Sichuan has that, too, making it the nation's first fracking frontier.
With each turn, the road became narrower and muddier, until we stopped at a gate behind which a tall red-and-white drilling rig shot up as high as the lush mountains surrounding it. We were at a shale gas well owned by China National Petroleum Corporation (CNPC), one of the nation's largest energy companies and its leading oil producer. Most of China was on holiday that week to commemorate 64 years since Mao declared the founding of the People's Republic, but out here there was no sign of rest. Workers in red jumpsuits drove by in bulky trucks. A drill spiraled 3,280 feet underground in search of shale gas, screeching as it churned around the clock.
An engineer whom we'll call Li Wei greeted us, peering out from under a hard hat. In his mid-20s, with a brand new degree, Li worked for a Chinese energy firm partly owned by Schlumberger, the Houston-based oil service company. Last July, Schlumberger opened a 32,000-square-foot laboratory in the region devoted to extracting hydrocarbons from shale gas resources. Like many other engineers at China's new wells, Li had never worked on a fracking operation before. We watched as he shooed away neighborhood kids playing by a brick structure straddling a pool marked "hazard" as though it were their tree house.
At first, Li said, drilling here didn't go so smoothly: "We had leaks, things falling into the well." They had to slow down operations as a result. Still, the team planned to drill and frack about eight other new wells in the area in the coming months.
China's early fracking operations face many risks, but the incentives to keep drilling are too good to pass up. Based on early sampling, Bloomberg New Energy Finance's Liebreich estimates that China is currently extracting shale gas at roughly twice the cost of the United States. Analysts expect those costs to fall as China gains experience, but even at current levels, shale gas production has been up to 40 percent cheaper—and geopolitically more desirable—than importing gas. As China's demand for natural gas continues to grow—between 2012 and 2013 it grew at 15 times the rate of the rest of the world's—domestic reserves will become increasingly important, says Liebreich: If China can continue to extract shale gas at the current cost, that "would be a game-changer." The "golden age" of natural gas that took root in North America, the International Energy Agency declared in June, is now spreading to China.
All that growth comes with a steep learning curve. Fracking requires highly trained engineers who use specialized equipment to mix vast quantities of water with chemicals and sand and shoot it into the ground at high pressures, cracking the dense shale bed and releasing a mix of gas, water, and other sediments to the surface. That's why service companies like Schlumberger and Halliburton have much to gain: China needs technology and know-how—and is willing to pay handsomely. "Selling the picks and shovels for the gold rush would be the analogy," Liebreich says.
No wonder, then, that multinational oil and gas giants have pounced. In 2012, Royal Dutch Shell inked a contract with CNPC. A company executive pledged to invest around $1 billion a year for the next several years in shale gas. BP, Chevron, Exxon Mobil, and Hess also have signed joint ventures to explore shale prospects with Chinese energy companies. In return, Chinese companies have invested in US fracking operations. Since 2010 the Chinese energy company Sinopec, the China National Offshore Oil Corporation (CNOOC), and the state-owned Sinochem spent at least $8.7 billion to buy stakes in shale gas operations in Alabama, Colorado, Michigan, Mississippi, Ohio, Oklahoma, Texas, and Wyoming. Chesapeake Energy alone got $4.52 billion out of its deals with CNOOC.
"The reason Chinese oil companies have gone after Chesapeake in the past year was because they wanted to apply the technology to tap the world's No. 1 shale gas reserves in China," Laban Yu, a Hong Kong investment analyst, told Bloomberg News. Whether or not China will be able to replicate the American shale gas revolution, it is clearly determined to try.
ONE HUMID AND DRIZZLY NIGHT, James and I found ourselves in Chongqing, a hilly metropolis on the Yangtze whose population is more than triple that of New York City. Chongqing's GDP grew an astonishing 12.3 percent in 2013, 4.6 points higher than the runaway Chinese economy as a whole. Its skyline looks like every major world city smashed into one—including near full-size replicas of the Golden Gate Bridge and the Empire State Building. The area is also home to castles modeled after those in France's Loire Valley, as well as "Foreigner Street," a 24/7 theme park where visitors can wander through an Egyptian pyramid haunted house, play mahjong by a Venetian canal, or sing karaoke under Rio de Janeiro's Christ the Redeemer. Foreigner Street also boasts a 1,000-toilet public bathroom, the world's largest.
Chongqing is one of the fastest-growing cities in the world, in both height and sprawl, with a half-million new residents arriving each year. It is something of a gateway to China's vast and relatively undeveloped west, booming like Chicago in the late 19th century. Its per capita natural gas consumption rate is one of the highest in the country and is currently rising by 8.5 percent a year, according to a report by the US Environmental Protection Agency. Much of the natural gas produced in Sichuan's fields ends up here. The city's officials expect that the municipality will need 530 billion cubic feet of natural gas by 2015—2.5 times the figure in 2011.
Chongqing's urban center is only 200 miles from the mountainside fracking fields we visited, but it might as well have been a different planet. From our hostel, we followed the neon lights until we reached Jiefangbei, a glitzy shopping district named after the tower it encircles, built in the 1940s to commemorate victory over the Japanese during World War II. Now banks, hotels, and skyscrapers dwarf the monument, their electric facades flashing the night sky, their tops fading into the clouds. People clutching umbrellas hurried past the Louis Vuitton, Cartier, and Gucci stores that were studded with giant lightbulbs.
Chongqing's unbridled growth is paralleled by a widening wealth gap and rampant corruption. It's a place where laobans—bosses—reserve $100 tables and drink $200 bottles of Moët & Chandon at nightclubs mere blocks from where porters haul shipments of clothes or steel goods from the riverbanks to shops atop the city's steep hills for a few pennies. It's also so overrun by triads—Chinese mafias sometimes deployed by the government as backup muscle—that when the city cracked down on crime in 2009, one criminologist estimated that at least 77 officials were arrested for colluding with gang members and protecting them from the law.
"Let some get rich first, and others will follow" is the philosophy that has driven China's economic reforms since 1979. But the disparity between rich and poor has grown so much that, during a meeting of China's top political advisers earlier this year, one attendee opined that the quality of life for 90 percent of peasants was no better than it was 40 years ago, in part due to burdensome medical expenses and limited access to education. In April, researchers at the University of Michigan calculated that in 2010, China's Gini coefficient—a measure of income inequality—was 0.55, compared to 0.45 in the United States. The United Nations considers anything above 0.4 a threat to a country's stability.
"You've got this 'damn the torpedoes' development strategy that sets out all sorts of quotas, expectations, and productivity targets that are not constrained or balanced in any way by environmental protection or public participation to hold people to account," says Sophie Richardson, director of Human Rights Watch's China program. Throw in corruption, she adds, and you see a toxic mix, one that has contributed to an unprecedented level of social unrest. By the latest official estimate, China has an average of 270 "mass incidents"—unofficial gatherings of 100 or more protesters—every day. In a 2014 study of mass incidents, researchers at the Chinese Academy of Social Sciences found that they were usually sparked by pollution, land acquisitions, labor disputes, and forced demolitions.
Fracking may soon join that list. Protests have already stymied drilling operations in Sichuan. From 2010 to March 2013, the Wall Street Journal reported, Shell had lost 535 days of work at 19 of its shale gas wells due to villager blockades or government requests to halt operations. "There are a lot of people in China who don't want to take political risks—they have too much at stake," Osnos says. "But when it comes to something as elemental as their health, and that's what pollution really is about, then they're willing to take a risk."
DESPITE BEING TOUTED AS A CLEANER alternative to dirty coal, fracking in China comes with plenty of environmental problems. The country's shale gas lies deeper underground and in more complex geologic formations than those deposits in the flatlands of Pennsylvania, North Dakota, or Texas. As a result, researchers estimated that the Chinese wells will require up to twice the amount of water used at American sites to crack open the reserves. Indeed, researcher Tian Qinghua points out that it's hard to imagine how there will be enough water to support an American-style fracking boom in a country with less water per capita than Namibia or Swaziland, where land twice the size of New York City turns to desert every year. Today more than a quarter of the country has already dried up, the equivalent of about a third of the continental United States.
An engineer who formerly designed cigarette and paper factories in the 1990s, Tian—who is in his 50s with spiked hair, rectangular glasses, and a professorial air—traces his environmental conversion back to the time he trained a group of technicians from Burma at a sugar factory in Yunnan Province. If they built a factory like this one back home, they asked him, would their river become black like the Kaiyuan River? "I began to doubt my career," he told us, sipping hot green tea out of a glass beer stein. "All the factories I designed were heavy polluters." He quit his job and began pursuing environmental research. "I wanted to pick a career I could be proud of by the time I retire," he said.
In addition to his concerns about fracking's enormous appetite for water, Tian also worries about its waste: the chemical-laden water that comes back out of the rock with the natural gas. In the United States, it is typically stored in steel containers or open pits and later injected underground in oil and gas waste wells. In China's early wells, wastewater is often dumped directly into streams and rivers. If fracking—most of which takes place in China's breadbasket—contaminates water or soil, Tian argues, it could jeopardize the nation's food supply. In a seismically active area like Sichuan, leaks are a major concern: Even a small earthquake—which, emerging evidence suggests, wastewater injection could trigger—might compromise a well's anti-leak system, causing more pollution. In the past year alone, more than 30 earthquakes were recorded in the Sichuan area.
In 2012, Tian and his team from the Sichuan Academy of Environmental Sciences proposed environmental standards for fracking in the province. Lacking financial and political support from the government, the proposal languished in the bureaucratic process and never became law. In June, Beijing officials announced that China will adopt new standards for shale gas development before the end of this year. But without proper enforcement, Tian says the standards will not necessarily prevent China's growing fracking industry from discharging waste and pollution—a cost he fears the environment can't afford.
BACK AT THE GUESTHOUSE COMPOUND in Xi'an one evening, after the conference had adjourned for the day, we sat for a lavish banquet of salty braised greens, fried eggplant, steamed fish, and roasted pork. A thin film of soot clung to the marble floors, tablecloths, and curtains.
I shared a table with Ming Sung, a lean, wispy-haired man in his late 60s who serves as the Asia-Pacific chief representative for Clean Air Task Force, a Boston-based partnership between environmental advocates and the private sector that's focused on reducing air pollution and greenhouse gas emissions. Sung, who spent 25 years as an engineer and manager for Shell, now splits his time between Texas and China, helping US and Chinese oil and gas companies lower their emissions.
Sung told us that shale gas, despite its reputation as a cleaner fuel, could be a huge pollution problem, if the technology wasn't handled correctly. For example, he says, if "you don't seal the wells properly, methane will leak." Although natural gas can generate electricity at half the carbon dioxide emissions of coal, methane is as much as 84 times more potent than carbon dioxide as a greenhouse gas over a 20-year period. (Some scientists argue that carbon dioxide is still more potent because it lasts longer in the atmosphere than does methane, which has an atmospheric lifetime of 12 years.) The EPA estimates that drilling for natural gas emits 0.04 to 0.30 grams of methane per well per second in the United States, the annual greenhouse gas equivalent of as many as 24 million cars.
But beyond the mechanical risks of fracking, there's a more fundamental problem: Shale gas might not even significantly reduce China's coal dependence. In the United States, fracking proponents have argued that natural gas is crucial to help with the shift from the dirtiest fossil fuels to renewable resources. But that argument falls apart in China. Unlike what happened in the United States, the Energy Information Administration's future projections of China's energy demand suggest that in 2040, coal will continue to dominate while natural gas, even with a golden era, will fuel only 8 percent of demand. "The whole pie is growing so rapidly that you still see a very carbon-intensive mix," says Rachel Cleetus, a senior economist at the Union of Concerned Scientists. As China continues to grow its economy and expand its cities, it will need every resource it can get—coal, gas, solar, wind, hydropower, and nuclear. James Fallows, a senior correspondent at The Atlantic who spent many years covering China, notes that the Chinese government "is pushing harder on more fronts than any other government on Earth" to develop energy sources other than coal. "The question is, will they catch up? Who will win that race between how bad things are and how they're trying to deal with them?"
Despite all these unknowns, the Obama administration is now encouraging other countries to tap their shale reserves. A year after Obama and Hu announced their shale gas agreement, in 2010, the State Department launched the Global Shale Gas Initiative, an "effort to promote global energy security and climate security around the world," as one researcher put it. As a JPMorgan research memo stated, "Unless the popular environmental concerns are so extreme, most countries with the resources will not ignore the [shale gas] opportunity."
TOWARD THE END OF OUR TRIP, we visited a village near Luzhou, a port city on the Yangtze with a population bigger than Los Angeles. We met a middle-aged woman named Dai Zhongfu, who told us that in 2011, Shell and PetroChina set up a shale gas well right next to her house. Standing under the shade of her plum tree and sporting a cropped haircut and a navy blue windbreaker, Dai said that occasionally someone would show up here and take a water sample from her well. They never identified themselves or returned with the results. By the time we arrived, Dai and her neighbors had grown wary of outside visitors; when we first met, her neighbors mistook us for water testers and advised her not to bother talking to us.
As the drilling continued, Dai said, her groundwater started to run dry, and now only rain replenished it. She doubted the water was fit for drinking. "After you use it, there's a layer of white scum clinging to the pot," she said. They couldn't even use it to cook rice anymore. "You tell me if there's been an impact!"
When I asked Dai why she and her neighbors hadn't protested, she said, "You know that we rural folk really have no recourse." The drilling was over, and now that the well was producing, all that was left were a few surveillance cameras and a concrete wall. "Now there's no chance they'll pay attention to us—where we get our drinking water, how we use it," Dai said. "People here have been abused so much that they're afraid."
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