China shale gas ambition faces reality check | South China Morning Post

The mainland is believed to have the world’s largest shale gas resource, but extracting the cleaner-burning fossil fuel is proving tougher than expected and highlights the hurdles policymakers face in plotting a shift away from coal-fired power.

Shale gas exploration is focused on the resource-rich but remote northwest, where a water shortage has been cited as a barrier to commercialisation, and in the country’s southwest. This region, mainly in Sichuan province, is said to have “challenging geology” and a high population density compounds the difficulties.

A lack of access by independent players to quality resource exploration acreages, which tend to overlap with existing conventional gas resources controlled by the nation’s two state-backed onshore oil and gas giants, also presents barriers to faster industry development.

“If China does not tackle the overlapping resource issue by opening up access to the [non state-owned] shale resource players, then China’s pace of shale gas development will depend almost entirely on the investment behaviour of [PetroChina] and Sinopec,” energy consulting firm The Lantau Group said in a report last month.

It said exploration rights granted in two rounds of tenders by Beijing in the past four years, while free of overlaps with the acreages under the control of the two state majors, are mostly in mountainous areas in southwest China that were “at best, second or third-tiered resources”.

Simon Henry, chief financial officer of European oil and gas giant Royal Dutch Shell, told investors in New York on September 5 that it would trim its investment in its joint shale gas exploration project with PetroChina in Sichuan, Bloomberg reported.

“In Sichuan, progress has been slower and more difficult than we might have hoped: partly for geological reasons, partly due to challenges operating in the highly populated agricultural region,” he was quoted as saying. “It’s likely it will be smaller than originally envisaged.”

Shell in 2012 signed the mainland’s first Sino-foreign contract to share the risk and reward of shale gas exploration.

Shell’s Beijing spokesman told the South China Morning Post: “The Sichuan geology is challenging and we are approaching this at the appropriate pace. Ongoing evaluation shows mixed results. We continue to evaluate and should know more [later] this year or [early] next year when we will decide how to move forward.”

Shale gas adheres tightly to underground rocks that require sophisticated drilling technology and the injection of water and chemicals to create cracks, so that the gas can be released.

The US Energy Information Administration estimated the mainland to hold the world’s largest shale gas resource; at 36.8 trillion cubic metres, this is 50 per cent more than the resource in the US. Shale gas’ commercialisation has helped the US surpass Russia to become the world’s largest natural gas producer since 2009.

“The challenges to the growth of shale gas [production] in China include geography and lack of abundant and readily available water close to the reserves,” said Tom Deegan, partner at Sidley Austin, who advises mainland state firms on energy deals.

The World Resources Institute, a Washington-based global sustainable development researcher, said in a report on September 2 that more than 60 per cent of China’s shale oil and gas resources are in areas with high water stress or arid conditions.

The proportion rises to more than 95 per cent in the energy-rich northwestern Tarim Basin, which means producers may face significant financial risks with the additional costs of accessing and transporting water.

While water is more abundant in the southwest, where the vast majority of the pilot drilling is taking place, seasonal variations in rainfall and a high population density in agricultural communities could also give rise to regulatory and reputation risks for producers, if water-intensive activities are conducted irresponsibly, the institute said.

Oliver Wang Guoqiang, chairman of Beijing-based SPT Energy Group, which helped firms like PetroChina construct and drill wells, told the Post late last year that water shortage is not as big a concern as Sichuan’s hilly terrain, which require up to 10 million yuan (HK$12.6 million) to be spent to haul the equipment and level the ground for drilling rigs to be installed.

So far, the state oil and gas giants have shown no signs of curtailing their shale gas ambitions, despite Beijing having quietly cut a national output target that analysts said was too optimistic.

Wu Xinxiong, the chief of the National Energy Administration, in August told an energy industry planning meeting for 2016-20 that it had set a target for 30 billion cubic metres (bcm) of shale gas to be produced in 2020, well short of the 60 bcm to 100 bcm target laid down in a policy circular in March 2012.

Peng Qiming, the chief of the Ministry of Land and Resources’ geological survey bureau, said last month some 20 billion yuan had been spent on 54 shale gas exploration projects in the nation by the end of July.

Of 400 wells drilled, some 130 are horizontal ones that are more costly than vertical ones. Each horizontal well’s drilling cost has fallen to between 50 million and 70 million yuan from 100 million yuan, after more domestically made equipment is deployed.

China Petroleum & Chemical (Sinopec) has planned to spend 21.5 billion yuan to drill 253 wells between last year and next year, and expected shale gas output of one bcm this year and 3.5 bcm next year, Peng said.

PetroChina has budgeted 11.2 billion yuan to drill 154 wells between this year and next year, with output in 2015 expected to exceed 2.5 bcm, he added.

via China shale gas ambition faces reality check | South China Morning Post.