China may have the world’s largest reserves of shale gas, but can it follow the American and Canadian example in extracting them? Although still at an early stage of its shale development plan, the government has set ambitious targets, with output supposed to reach 6.5 billion cubic metres of gas by 2015, rising to between 60 and 100 billion cubic metres by 2020. However, doubts have been growing about the chances of hitting those targets, following reports that Royal Dutch Shell is planning to scale back its investments in the country.
Last month, Shell CFO Simon Henry told Bloomberg that progress in Sichuan “has been slower and more difficult than we might have hoped, partly for geological reasons, partly due to the challenges operating in a highly populated agricultural region.”
His comments have spurred debate in the media about the merits of China’s shale gas revolution. Two key environmental concerns top the agenda. Potentially the most serious relates to earthquakes, as about 21% of China’s 36.8 trillion cubic metres of shale gas lies in Sichuan, one of the most earthquake prone regions. Memories are still fresh of the devastating 2008 quake, which killed almost 70,000 people, with recent scientific papers suggesting that it may have been caused by human activity, particularly a build-up of water at Zipingpu Dam, north of Chengdu.
Research in the US has also linked fracking to earthquake activity, following a tremor at a town called Sparks in Oklahoma, which doesn’t lie close to a fault line. The November 2011 quake caused two deaths and flattened 14 houses. Sichuan is about eight times more densely populated than Oklahoma.
Other fracking-related environmental concerns include groundwater contamination and the release of methane. But in China’s case, environmentalists say water shortages are another major issue. Each fracking well requires 25 million litres of fresh water for the hydraulic process, which involves shooting pressurised liquid into the ground to separate the gas from the rock in which it is contained. But as US think tank the World Resources Institute has stated, over 60% of China’s reserves are in areas with high water stress or arid conditions – “a worrying fact given the country’s existing environmental concerns.”
But what is likely to have bothered Shell most is the financial burden of fracking in China. According to CBN, Shell’s Sichuan project has cost twice that of a similar project in the US. Moreover, the recent decline in crude oil prices has raised questions on whether shale gas is indeed the more economical alternative to more traditional fossil fuels.
China’s shale reserves sit deeper (2,000 to 3,000 metres below ground compared to 1,000 metres in the US) and are generally less saturated (90 metres thickness compared to 500 metres). This makes the gas more expensive to extract.
Last week, Shell’s joint venture partner, CNPC told domestic media outlets that there have been no discussions regarding a scaling back of the project in Sichuan, which the two agreed to work on in 2012. It also said that whatever Shell decides, there will be no impact on CNPC’s overall activities in Sichuan. Company officials told CBN that CNPC plans to invest Rmb13 billion ($2.12 billion) in 2014 and the first half of 2015. This should increase shale output from 200 million cubic metres in 2014 to two billion cubic metres in 2015.
CNPC also said it is in discussions with other international partners interested in the country’s shale gas resources, and the state giant has signed a cooperation agreement with ConocoPhilips. Among these potential projects, the Shell joint venture is CNPC’s smallest, with a projected output of 100 million cubic metres of gas in 2015.
On the plus side, analysts say the economics of Chinese fracking have been improving. Drilling costs have come down and drilling cycles have fallen from 120 days to 70.
China’s largest shale gas project is the 2.1 trillion cubic metre Fuling field in Sichuan, operated by Sinopec. It hopes to reduce investment costs to Rmb50 million per well over the next three years compared to Rmb83 million currently and Rmb100 million in 2012.
Sinopec is selling the gas to local chemical firms but anticipates larger profits once it finishes building an LNG plant close by. The company is targeting output of 4.8 billion cubic metres by 2016 rising to 10 billion by 2017.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.