Shale gas revolution in China « ZHU+RICH

The future prospects of China’s energy requirements leave little doubt about the necessity of developing a new source of energy at lower cost and at reduced environmental impact compared to the current primary source of coal. However, shale gas deposits are placed at depths double than those in North America and even in mountainous areas, making the current technology and infrastructure insufficient for the scope.

In 2011, marketable reserves of 32 billion cubic meters were estimated in four major fields – Sichuan, Tarim, Junggar, Songliao – of marine origin containing a quality of gas apt to the production of shale gas to which three further deposits – Jianghan, Subei, Yangtze – of minor dimensions and with more complex geological structure can be added, for a total area of about 2.75 million square kilometers, equivalent to almost the entire India’s land. Other reserves – resulted significant, although not yet quantifiable – are located in the central-western China (Ordos, Qaidam, Turpan). The total resources are estimated at approximately 136 billion cubic meters.

In the development of its 12th Five-Year Plan, the Chinese government has set an annual production of shale gas by 6.5 billion cubic meters by 2015, for an economic value of USD 60 billion in 2020, at least. The main obstacle to the development of shale gas is the absence of a free market for energy, discouraging the high investments necessary for extraction. Chinese producers are caught between the anvil of governmental limits of tariff and the hammer of rising production costs.

The impervious geological characteristics of the deposits and the scarcity of water needed for mining operations dictated by the technology of hydraulic fracturing are an additional burden to the development of the blooming industry of shale gas. However, these difficulties are surmountable given that the objectives of the petrochemical industry are defined by the central government and the Chinese trade surplus provides a large amount of capital.

Over last years, under government action, the recent explorations activities have been intensified to provide preliminary data on the potential of reserves. In December 2010, China Petroleum (Sinopec) completed the first vertical drilling in Yuanba, about 500 km from Chengdu, the capital of Sichuan province, and in mid-2011 it completed the first horizontal drilling in Fuling, close to Yuanba, still in the rich basin of Sichuan. Similarly, PetroChina (CNPC), which produces 73% of all domestic gas, completed the first horizontal drilling in early 2012. To date, it is estimable about two dozen of shale gas wells created by hydraulic fracturing.

The Chinese government has invited foreign engineering companies to collaborate with Chinese counterparts or even to manage drilling activities on their own. The initiative has generated the cooperation between BP and PetroChina, China Petroleum and Chevron, as well as the acquisition by Australia’s Layton of the rights to conduct exploration in the Ordos basin in the central province of Shanxi. Among other foreign multinationals involved, there is Norway’s Statoil, France’s Total, the US-based ExxonMobil, and the Italian company ENI, which in 2011 signed a memorandum of understanding with PetroChina and China Petroleum. However, to play the lion’s share is the Dutch Shell, which has already signed agreements with three major Chinese oil companies and signed its first production sharing contract with PetroChina. Shell is the world’s leading producer of liquid gas and has the ambition to produce more natural gas than crude oil.

Beijing’s government strictly controls the transfer of rights to use shale gas fields through public auctions. The management of rights remains a barrier to entry for foreign oil companies because the rights are only granted to Chinese companies or joint-ventures of these with foreign companies. The different treatment to foreign companies is also demonstrated by the absence of deals by major Chinese oil companies on over 150 auctions till now held, since these companies already have exploration rights on the major country reserves.

The first auction for four shale gas blocks, held in June 2011, was granted to only six national companies, after which only two blocks were awarded, namely the block of Nanchuan in Guizhou province assigned to China Petroleum and the block of Xiushan nearby the megalopolis of Chongqing allocated to Henan Provincial. A second auction, launched in October 2012, was opened to joint-ventures controlled by Chinese companies for twenty blocks with a total area of twenty thousand square kilometers, of which only nineteen reached the minimum of three bids required to be valid.

To encourage participation in the auctions, the winners can enlarge the explorations in the areas adjacent to the blocks, once they have reached the break-even point. Many of the participants were companies with no experience in the petrochemical industry. Of the 19 blocks, only 16 were awarded, and among the winners there were six state-owned companies, eight local governments and two private companies for a total investment of 12.8 billion yuan (EUR 160m) over a period of three years. Shenhua Energy, the leading national producer of coal, won the auction for the block of Baojing in the southern province of Henan, which covers an area of 1,189 km2. Shenhua Energy announced investments for 874 million yuan (EUR 110m) in three years, highlighting the great risks it expected to run.

via Shale gas revolution in China « ZHU+RICH.