21/08/14 – The Role of Shale Gas in China’s Future


U.S. production of shale gas has single-handedly shattered the expectation that the United States would emerge as one of the world’s largest natural gas importers by making the country one of the world’s largest exporters of the fossil fuel in the near future. China, which owns the world’s largest estimated shale gas reserves — more than 30 trillion cubic meters — hopes that shale gas could do the same for China.

However, China is not the United States and faces technological, geological, technical and topological hurdles in developing its shale gas resources. China’s domestic oil and natural gas companies do not have the experience or technological base that the United States was able to tap into in order to quickly develop its resources once they became economical. Progress is being made, however, and China Petroleum & Chemical Corp., commonly known as Sinopec, is developing one field with primarily domestically developed equipment and personnel. Yet it will take time for China to create a support and development base to progress from pilot shale gas development phases to widespread production phases.

For example, China’s most promising basin, the Sichuan, is in a deeply faulted region. Not only does this limit the utility of horizontal drilling, but also the frequency of earthquakes in the region will raise fears that they are being caused by hydraulic fracturing. Even if those claims are completely untrue, this may not change the local population’s perception when disaster strikes, adding to environmental opposition to shale gas development in China. Additionally, the region is mountainous, and this slows the movement of equipment from site to site and adds to the cost of production.

Despite the downward revision of its targets for 2020, the year has been successful for China National Petroleum Corp. and Sinopec — China’s two largest oil companies — in their own shale gas endeavors. Sinopec’s flagship shale gas project is the Fuling project, which is already producing 3.2 million cubic meters of shale gas per day. This led the company to increase their projections for 2015 to 5 billion cubic meters, up from earlier projections of 1 billion cubic meters, after wells drilled over the last 18 months performed much better than anticipated. The company expects the block to reach 10 billion cubic meters of production per year in 2017, which is a reasonable estimate. China National Petroleum Corp. does not have a flagship project and lags slightly behind Sinopec, but recent success caused the company to increase their expectations to 2.6 billion cubic meters in 2015 — an upward revision of their planned target by nearly 75 percent. They expect to produce 11 billion cubic meters of shale gas annually by 2020. In total, China’s output overall in 2015 and 2017 looks like it will surpass Beijing’s target figure.

Partnerships with Foreign Companies

Joint ventures between China’s three main oil and natural gas companies and the supermajors have not progressed as quickly. Royal Dutch/Shell signed a production-sharing contract with China National Petroleum Corp. for developing the Fushun-Yongchuan block and Shell spent $1 billion in 2013 in the Sichuan basin, focusing on exploratory and appraisal drilling and learning the geology. Shell is spending the year continuing this program before making a final decision on whether or not to move forward with the production-sharing contract to fully develop the block.

In general, the supermajors have struggled in China, and their investments have not always been profitable. For example, Chevron’s big investment in China was the $6.4 billion, 12 billion cubic meters per year Chuandongbei natural gas project. It was originally slated to come online in 2010 before being delayed to 2015 because of its geological complexity and disagreements with Chevron’s partner, China National Petroleum Corp., and the Chinese government on how to implement the project. The delays plus cost overruns (36 percent over original estimates) have made it a difficult investment.

China, hoping to change its image and increase profitability for joint ventures in its shale gas sector, is in the process of setting up an extensive incentive program. These measures include a value-added tax refund, waivers on import tariffs for equipment, direct subsidies and a resource tax waiver. One of the most important incentives will be a complete deregulation of prices. On Sept. 1, the wholesale price for imported liquefied natural gas, shale gas and coalbed methane will be completely independent of government control. China is also raising the wholesale price for non-residential users by 20.5 percent to help the profitability of deep water and tight gas production.

There have also been several important partnerships between China’s national oil companies and key Western oil service companies. These types of contracts are just as important as foreign majors’ participation in bringing in the equipment, know-how and technology to develop these resources. In June, Sinopec signed a joint venture deal with FTS International, one of the largest well completion services in China. This joint venture will include the manufacture of pumps and equipment in the United States optimized for well completion and stimulation in China’s shale basins.

Sinopec has also announced the formation of a joint venture with Weatherford International to collaborate on advanced drilling tools, such as those used in high temperature and high pressure wells, and well completion. In July, Halliburton Co. formed a joint venture with Petrotech (Xinjiang) Engineering to provide hydraulic fracturing and other advanced oilfield services in Xinjiang province, home to one of China’s other massive shale deposits, the Tarim basin.

China’s Other Natural Gas Strategies

These partnerships should help China eventually develop its extensive shale resources, but as mentioned, China’s demand will grow dramatically, and Beijing appears to be using all available options to secure its natural gas supply. While shale gas offers the most potential, China is developing alternatives. Coalbed methane production could reach 20 to 30 billion cubic meters per year by 2020. Tight gas and conventional natural gas could approach 150 billion cubic meters annually by 2020. Moreover, China has plans for coal gasification, which involves the underground gasification of coal and either upgrading it into synthetic natural gas or using it directly to generate power. The latter is a part of Beijing’s push to move some power generation westward to less populous regions where environmental concerns over smog are less pronounced.

At the same time, China is moving to secure large volumes of natural gas from both pipeline and liquefied natural gas sources. China National Petroleum Corp. deals with Russia, Turkmenistan and Myanmar on natural gas supplies coming over land have received much attention, especially May’s $400 billion deal with Gazprom for 38 billion cubic meters of natural gas per year for 30 years, but China has been building up its regasification facilities just as quickly and the country will still depend on liquefied natural gas exports.It is also important to realize that Beijing’s crackdown on PetroChina and the China National Petroleum Corp. is about removing the companies’ power and influence in China. Ever since the late 1990s, when China created three vertically integrated national oil companies, Beijing pushed for the three to compete with each another. China National Petroleum Corp. has been the beneficiary of the deals for piped natural gas, as it controls much of China’s internal natural gas distribution pipelines, whereas Sinopec and China National Offshore Oil Corp. have been pushing for liquefied natural gas contracts and import terminals instead of pursuing piped natural gas. Already, almost 70 billion cubic meters of regasification capacity is in operation or under construction. Expansion proposals at those facilities could add 80 billion cubic meters in capacity. Sinopec alone has five new plants under construction.  The contracted volumes of LNG supplies to feed these regasification facilities lag behind the total regasification capacity coming online, but China also buys LNG on the spot market.

While China’s amendment of its shale gas forecasts is indicative of how slowly the sector could develop, China remains strongly committed to the continued expansion of natural gas supply and use. This revision also does not deter the long-term potential and possible success of China’s shale gas development. In time, China will certainly be a major natural gas producer, and recent events have been relatively encouraging. However, China’s shale gas development might never be as profitable as the United States’, nor will it seemingly boom overnight.


Source – Forbes.com