At a time when several countries–especially in Europe– are losing their enthusiasm for shale gas, China seems determined to go ahead with exploration and production. During the 12th Five-Year-Plan (FYP) period, Chinese government and petroleum enterprises actively promoted the development of shale gas industry, and made certain progresses in various aspects. Meanwhile, a series of preferential and supportive policies were developed to encourage shale gas exploration

Worries about the high levels of urban pollution from the burning of coal are prompting a gradual move away from coal for industrial use and power generation toward natural gas. At the same time, the government wants to limit the amount of gas that has to be imported and is promoting the development of shale production alongside that of conventional gas.

New deal

China’s state oil and gas companies have been slow so far to open up the country’s seemingly vast reserves of shale gas and have sought the participation of large international firms. Given the present low prices for gas, foreign interest has been slow to emerge, but the recent signing of a production-sharing contract (PSC) by BP with China National Petroleum Corporation (CNPC) for a shale gas block in Sichuan province has given rise to hopes of renewed outside interest in Chinese shale.

Shale Gas in China (FT)
Shale Gas in China (FT)

Sichuan is the centre of China’s onshore conventional gas production and is also emerging as the principal area of interest for shale gas. BP’s PSC with CNPC covers a block known as Neijiang-Dazu. Another large state company, Sinopec, operates China’s main shale gas-field elsewhere in Sichuan, at Fuling, although Fuling is not a pure shale gas formation, producing tight gas from sandstone horizons as well. Total production in early 2016 was reported as 530 mn cfd, and the plan is to raise this to 1 bn cfd by 2017. Fuling’s production, however, is running below planned levels. Last year’s target of 630 bn cfd was undershot by over 40% according to Chinese industry sources.

The Chinese government nevertheless continues to say that shale output will reach 2.9 bn cfd by the end of the present decade, citing the enormous size of the country’s shale gas reserves. The US Energy Information Administration (EIA) estimates China’s technically recoverable reserves at 1,115 tcf: the largest in the world, according to the EIA; China’s target nevertheless looks far too ambitious.

Reconsidering shale gas

As oil and gas companies continue to seek ways of cutting their capital expenditure, shale projects are coming under increasing scrutiny: and buying existing shale operations is in many cases a better option than going in at the pre-exploration stage. Some of the largest international oil and gas firms have already indicated their reservations about becoming involved in Chinese shale. ConocoPhillips and Chevron have relinquished shale blocks there and Conoco decided not to take up the offer of a PSC in Neijiang-Dazu. Shell is also reported to be reconsidering its commitment to shale, having signed a PSC with CNPC in 2012 covering the Fushun-Yongchuan block in Sichuan. Shell said in 2014 that there had been problems with the geology, also citing the difficulties in operating in a densely populated agricultural region. One Chinese state company, China National Offshore Oil Corporation (CNOOC), has also suspended its operations on a shale block in Anhui province.

High exploitation costs

China׳s geological conditions are more complex than other countries (such as the US). It estimates that the average burial depth of shale gas in the US is about 800–2000 m, while the average depth in China is over 3500 m. Even though the China׳s Southern marine shale region is considered to be the most promising area, there are surface ravines, mountains and canyons around densely populated areas, which severely limit the large-scale, multi-construction operation of drilling works. What is more, because of the differences in geological characteristics, the equipment employed from abroad cannot be applied similarly. In addition, rock and complicated topography in China not only directly heightens the exploration difficulties, but also greatly increase the mining cost

Head winds in Chinese Shale gas
Head winds in Chinese Shale gas

Shortage of strong incentive policy and regulatory system

Although China has issued a series of preferential policies including the exemption of resource tax and mining fees to encourage the development and utilization of unconventional gas resources, the shale gas in its infancy of development is still short of strong incentive policies to encourage the exploration and development. The first incentive policy: “Notice on releasing the subsidy policy for shale gas development and utilization” which was issued in November 2012 gave subsidy standards of 0.4 CNY/m3 to shale gas exploration companies.

But the government clearly stated the necessarily technical requirements for companies to obtain the subsidy. Otherwise, the companies cannot receive the preferential subsidy unless they meet the requirements. In addition, China׳s natural gas wellhead prices are generally low and the government subsidies only lasted until 2015, while most of exploration blocks tender requires at least three years to produce results. That is to say the future of shale gas exploration may also face losses. Therefore, the subsidy policy is of insufficient support, low-level implementation and limited benefit, which is not enough to stimulate the enthusiasm of shale gas exploitation.

Besides the shortage of strong policy support, absence of effective regulation system is another policy barrier for shale gas development in China. Although the first two rounds of bidding for shale gas exploration rights have been successfully held, the corresponding specifications relevant to the new independent mineral of shale gas has not yet been issued, neither practical supervision measures nor management methods which have great impacts on the healthy and orderly development of shale gas

Sinopec and CNPC nevertheless remain optimistic. Sinopec maintains that shale gas is an important part of the company’s growth strategy, while both Sinopec and CNPC have begun to construct pipelines to handle gas produced from shale. There are nevertheless considerable geological, engineering, and economic obstacles to be overcome before China’s ambitious shale gas production targets can be met.

From this point of view, it might well be better for the Chinese to concentrate their efforts in terms of unconventional gas on tight gas reservoirs which, despite their low permeability, are often easier to exploit than shale deposits.

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Reference
  1. Survey: Fears over energy security provide boost for shale gas prospects. Oil and Energy Trends 2014; 39:8; pp 10–18, DOI: 10.1111/oet.12183.
  2. The status quo review and suggested policies for shale gas development in China; Li Y Li Y Wang B Chen Z Nie D et. al.; Renewable and Sustainable Energy Reviews 2016 vol: 59 pp: 420-428
  3. http://www.ft.com/cms/s/0/67f25666-8d2d-11e1-9798-00144feab49a.html
  4. http://www.thegwpf.com/energy-hungry-china-struggles-join-shale-gas-revolution/

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