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Soaring domestic consumption and new environmental requirements ae spurring China’s E&P strategy to increase gas production and create a hub for oil-related services
Shale gas resources are at the early stages of development in China, with these resources currently falling almost exclusively into the unproved and technically recoverable bracket, without any serious production.
According to estimates made by the US Energy Information Administration (EIA), China has the world’s largest unproved wet shale gas technically recoverable resources. But it is facing technological challenges and water resource issues, among other problems, that are hindering the development of its shale sector.
Based on the EIA’s estimates published in June 2013, China’s shale gas sector appears to have great potential for domestic and foreign operators. China’s unproved wet shale gas technically recoverable resources are estimated by the EIA at 1,115 Tcf (31.6 Tcm), apparently the world’s largest.
Due to the resources estimates, and in light of the United States’ success in accessing its shale resources, it is understandable why the government of the People’s Republic of China would want to focus on shale gas.
However, China faces many challenges before it can achieve success that comes close to that of the US in developing shale. The challenges are varied, ranging from topography, finance, technology, and geology, to water supply, infrastructure, and government administration.
It also simply takes time. The “overnight shale gas revolution” in the US in fact took 30 to 35 years of
persistent work to develop, gradually take off, and emerge into prominence around 2009.
In January 2013, the Chinese government awarded 19 blocks (out of 20 offered in this second shale gas licensing round) to 16 domestic companies, three of which won two blocks each. Chinese coal and power companies won eight blocks, with the remainder awarded to investment companies set up by local governments. While most of these companies have little or no experience in oil and gas exploration and production, the main objective of this licensing round could have been to include a broader range of companies—besides the large companies, China National Offshore Oil Corporation (CNOCC), China Petrochemical Corp. (known as Sinopec), and China National Petroleum Corporation (CNPC), which already have claimed or been awarded a large proportion of China’s prospective shale gas acreage. It is also possible that the blocks offered did not attract CNOCC, Sinopec, or CNPC because their problems were greater and their quality was lower than the blocks these companies have already been awarded.
By late July 2013, the MLR said the companies awarded the second-round licenses faced a number of challenges, including a lack of skilled and technical personnel, insufficient technological expertise, and limited financial resources. The blocks are also geologically complex, making initial surveys difficult. In addition, some of the companies have not lived up to initial promises regarding work commitments and have failed to make their investments in the blocks a priority, the ministry said. Although the winning companies are free to bring in both local and foreign partners, a few foreign independent companies involved in China’s unconventional gas sector turned down farm-in offers because they judged the risks were too great.
In March 2013, Shell and CNPC (PetroChina’s parent company) signed a shale gas production-sharing contract (PSC) for the Fushun-Yongchuan block in the Sichuan basin. It was the first shale gas PSC approved by China. Shell and CNPC had signed an agreement about a year before to develop the block, following an agreement made with PetroChina in 2009 to study shale gas exploration in the Sichuan basin.
Shell, which said it is spending at least USD 1 billion each year developing unconventional gas resources in China, could be on its way to signing China’s second shale gas PSC, this time with Sinopec. According to a Shell spokesperson, Shell and Sinopec signed a joint study agreement (JSA) on 29 June 2012 for the Xiang E Xi block, which covers around 500,000 hectares at the junction of Chongqing municipality and the provinces of Hubei, Hunan, and Jiangxi.
Shell and Sinopec completed the first well, Liye-1, in August 2012, but subsequently sealed it after hydraulic fracturing results were “not very satisfactory,” according to an unnamed Sinopec official. By November 2013, the companies were drilling the Engye-1 well, the second of their three-well program to evaluate the Xiang E Xi block’s shale resources.
In a Financial Times interview (6 October 2013), Peter Voser, then chief executive officer of Shell, “singled out China, where Shell has drilled 22 wells, as one of the most prospective countries for shale gas, but warned that costs there were higher than in the US.”
It is believed that there have been fewer than 150 shale gas wells drilled in China, mostly in and around the Sichuan basin in southwest China, with commercial production described as negligible.
All this casts serious doubt over a government target of 628,600 Mcf/d (229.5 Tcf [6.5 Bcm] per year) of shale gas production starting in 2015.
Soaring domestic consumption and new environmental requirements ae spurring China’s E&P strategy to increase gas production and create a hub for oil-related services
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