China's quest for gas

Utilities Unbundled - Issue 15

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Despite a wealth of shale gas reserves in China, extracting it economically is proving difficult.

“More work needs be done to develop a mature technology, based on exploration experience in China and parameters consistent with our own geological conditions.”

— Professor Dujie Hou, China University of Geosciences

China’s abundant shale gas reserves have attracted worldwide attention, with the country’s Ministry of Land and Resources (MLR) estimating a recoverable resource of 25,000 billion cubic meters (m3). An independent assessment by the US Energy Information Administration indicated a geological resource of 100,000 billion m3 and a recoverable resource of 36,000 billion m3.

In 2010, the Chinese Government ambitiously targeted domestic shale gas output by 2015 of 6.5 billion m3 in its “2011-2015 Shale Gas Development Planning” document, kick-starting three years of drilling and exploration.

Investment boom in shale gas

Investments to develop shale gas resources are rising rapidly. The first round of the China Shale Gas Resource Potential Assessment was in 2011. During the same period, various new regulations were issued; the most important brought the private sector into shale gas exploration and opened bids for exploration rights.

The restructuring was successful, with one-third of the 83 participants in the second round of bidding for exploration rights (September 2012) represented by non-state-owned enterprises (versus none in the first round in 2011).

By mid-2013, the number of wells drilled by the MLR and by independent oil and gas companies stood at 129, up from 36 in 2011. By 2012, shale gas production output had risen sharply since its earliest development stages to 25 million m3.

Financial and technical challenges

The sector still faces several obstacles, most significantly the large amounts of start-up capital required and the long payback period involved. Drilling a single well may cost up to RMB100 million (US$16m), and profitability is conditional on the discovery of shale gas resources.

The sector must also contend with underdeveloped technology. “Due to the differences between the geological conditions of China and the US, the exploration and downhole technologies imported from the US cannot be directly applied here,” says Professor Dujie Hou of China University of Geosciences.

These difficulties put pressure on gas developers, as the technology is immature and exploration results highly uncertain. Professor Hou argues that a more stable and sustainable development model is needed. “China must first increase its investment in technology to improve success rates for drilling, rather than continue its investments in exploration.”

Investment expected to slow

The four largest domestic oil companies seem reluctant to expand their shale gas exploration in China. As a result, Professor Hou says, “Investment is showing signs of cooling down. Investors are becoming more cautious.” Given it will take at least 10 years for China to set up large-scale exploration, the government’s planned production target for 2015 looks unachievable.

Professor Hou adds, “More work needs to be done to develop a mature technology, based on exploration experience in China and parameters consistent with our own geological conditions.”

Opportunities for foreign E&P players

Professor Hou says China is optimistic about the future of shale gas while acknowledging there is a long way to go. He sees good opportunities for foreign E&P companies. “In general, China is supportive regarding cooperation and joint ventures. Cooperation between PetroChina and Shell is good news for the sector.”

According to MLR data, none of the 84 wells drilled in 2012 have proved capable of producing shale gas economically. But Professor Hou argues “it is still too early to state definitively that no shale gas exists in the block. It would be unwise to come to such a conclusion based on our limited exploration experience. The profitability of such projects can only be realized over the very long term.”

This is an abridged version of the full article in Utilities Unbundled.

For more information on this topic, please contact Duncan Coneybeare.