Energy & Resources

Hit the gas

China steps up shale gas industry’s development

Shale-w

An alternative to crude

It has a long way to go before it rivals the US, but China is starting to ramp up its shale gas production after a number of false starts.

Last month, the government executed its first public auction of a shale gas block with proven reserves (a 695 square kilometre block in Guizhou province). It is one of two new areas being targeted: the other is in Hubei province. The three-year exploration rights went to Guizhou Industrial Investment Group for Rmb1.29 billion ($196 million), after fierce bidding, which began at Rmb42.36 million.

Jiemian, a news portal, describes it as an important moment in China’s shale gas history after five-years of big plans but little action (for our earliest discussion of the topic see WiC151). It quotes a research report from China5e.com, which concludes that a majority of the 16 enterprises which won shale gas development rights in 2012 are still at the stage of “formulating plans.”

As a result, China missed its production target of 6.5 billion cubic metres of shale gas by the end of its 12th Five-Year Plan in 2015 (it hit 5.7 billion). More importantly, it was clearly going to fall very far short of its original ambition to produce 60 billion to 100 billion cubic metres by 2020. Earlier this summer, that target was pushed back by a decade to 2030.

According to official figures, China produced 7.9 billion cubic metres last year. By contrast, the US produced 15.8 trillion cubic feet, crowning America as the world’s largest shale gas producer with Canada second and China third.

China’s domestic media readily acknowledges shale is one industry where the country is unlikely to significantly close the gap with the US. The China Daily explains that local production has been hampered by limited interest from the world’s oil majors, which retain the technical knowledge to drill to the deeper levels below 3,500 metres where up to half of Sichuan’s reserves lie. As we reported in WiC258, China faces a number of added challenges ranging from water shortages in shale-rich provinces such as Sichuan, to the existence of the Longmenshan fault line between the Indian and Eurasian tectonic plates.

Both Shell and ConocoPhillips have already pulled out of the country’s shale efforts. The former signed an agreement with state giant CNPC in 2012, but terminated it in late 2014 after drilling produced “mixed results”. Likewise, ConocoPhillips never progressed beyond a joint study agreement with CNPC in 2013. The only international major left is BP, which has signed two cooperation agreements with CNPC.

Two of China’s oil majors, PetroChina (CNPC’s listed vehicle) and Sinopec, have been building up their own shale expertise. PetroChina’s chief exploration director, Chen Gengsheng, tells Jiemian that single well production costs have come down from Rmb130 million to Rmb50 million and predicts a further fall to Rmb40 million by 2020.

He says the group is improving its rates of return on its shale blocks. Shale capex this year will be up 10% to Rmb143.6 billion, with a production target of 12 billion cubic metres by 2020.

Sinopec is expected to spend Rmb50.5 billion this year, up 5.4%. It recently signed an agreement with the Chongqing municipal government to produce 15 billion cubic metres of gas by 2020.

Jin Zhijun, director of the group’s research institute, estimates the two will account for the bulk of the government’s long-term production target, with Sinopec producing 30 billion cubic metres by 2030 and Petrochina 50 billion.

“China’s shale industry is still at the exploratory stage,” he tells Interface News. “But the revolution has begun.”


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