Energy & Resources

Time to dig deeper

China’s shale dreams slow to take off


Fracked-off actor: Matt Damon

Supporters of shale gas say that industry critics like Vladimir Putin – desperate to defend Russia’s traditional energy firms – are starting to panic, scaremongering on environmental grounds whenever they get the chance. Even Hollywood has been co-opted in defence of Big Oil, it has been claimed. That’s after suggestions that Abu Dhabi investors in Matt Damon’s Promised Land – an anti-fracking film – had ulterior motives.

China, on the other hand, sees the shale revolution as both a threat and an opportunity. Its shale resources give reason to be bullish, with reserves at least 50% greater than the United States, according to the US Energy Information Administration. Yet the Chinese are far behind the Americans in production terms. As a result Beijing has plans to push up shale gas volumes rapidly, to 6.5 billion cubic metres a year by 2015 and as much as 100 billion cubic metres annually by 2020.

But as WiC counselled last year (see issue 151), the industry faces some daunting challenges, not least that China’s shale is more difficult to frack than its American equivalent. American explorers have focused on flatland states like Texas and North Dakota, for instance, while Chinese deposits occur below less accessible terrain, including mountainous Sichuan. They are also deeper underground. Explorers say higher drilling densities are required, meaning more power consumption and greater wear-and-tear for equipment.

Another problem is the high volume of water required in the fracking process, a particular problem in the arid areas in which shale gas is often present. Chinese companies lack the skills and experience to extract the gas in a profitable way too, trailing their foreign counterparts technologically. As a result, progress towards production targets has been slow. Century Weekly magazine has provided an update: just 56 exploratory wells were dug in the first six months of this year and only 24 are producing gas. A mere six have daily output of 10,000 cubic metres or more.

There are also doubts about the economics of China’s shale prospects. Chen Weidong, a researcher at CNOOC’s Energy Economics Institute, told Century Weekly that an average well in North America produces five million cubic metres of gas each year. Even if Chinese firms can reach that level of output, they will need to dig 20,000 wells to achieve the productions goals set for 2020. But each well costs up to Rmb100 million to develop, Chen points out. Can China really afford a Rmb2 trillion ($326.7 billion) investment in shale?

Another policy priority: the introduction of more competition in the sector. Three main types of rival to the likes of PetroChina, Sinopec and CNOOC have now emerged: new entrants like Huaying Shanxi Energy, hoping to specialise in shale gas extraction; power companies like China Huadian, wanting to reduce their reliance on coal; and investment consortia led by local governments keen on exploiting shale resources in their own backyards.

But the hopes for a more competitive landscape are still to be realised, with the state giants controlling 77% of the blocks currently in use and owning about 80% of the shale assets identified as having potential.

Uncertainty on costs and revenues in the sector isn’t helping attract new entrants, says Oriental Outlook. But the magazine has also voiced criticism of the bidding process, warning that some local governments have overpaid in their enthusiasm to win exploration rights. (“Our bosses issued a strict order that we must win a block,” one official explained.) Chongqing Energy Investment Group is said to have stumped up Rmb1.7 billion for one block, or 10 times as much as Sinopec, the only other bidder.

Winning bidders also committed to completing investment within a three-year deadline. But the costs and difficulties of extracting gas are seeing slippage on timelines, leading to doubts that promises can be met. In part that’s because the oil majors have missed deadlines of their own, says Oriental Outlook, and if they are seen to be ignoring the regulations, other companies will conclude that the rules aren’t going to be enforced.

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