Aug 26, 2013 07:02 PM

China's Lofty Goals for Shale Gas Development Just Pipe Dreams, Experts Say

(Beijing) – China wants to reap the benefits of a shale gas revolution similar to the one in the United States, but there are many obstacles to this happening, experts say.

In the first half of 2013, 56 shale gas wells were in the exploratory phase in the country, but only 24 were producing gas. Only six wells – all dug by either China Petrochemical Corp. (Sinopec Group) or China National Petroleum Corp. (CNPC) – had daily output capacity of 10,000 cubic meters or more. And all the shale gas blocks sold in the most recent round of auctioning were in the early phases of prospecting, meaning they had not produced a drop.

The latest five-year plan set for the shale gas industry was laid out in 2011. It set a production goal of 6.5 billion cubic meters of shale gas by 2015, but many industry insiders say this will be hard to achieve.

"As we are facing enormous cost pressures and other problems, the speed of exploration has been slower than anticipated," Zhang Dawei, director of the Mineral Resources and Reserves Evaluation Center of the Ministry of Land Resources (MLR), said at a symposium in June.

Chen Weidong, lead researcher at China National Offshore Oil Corp.'s (CNOOC) Energy Economics Institute, said the average annual production of a shale gas well in the United States is about 5 million cubic meters, and China would need 1,300 operating wells to reach its goal.

"At present, it costs us about 80 to 100 million yuan to develop a single well," he said. "So even if we were successful in developing the number of wells required, we'd be looking at 130 billion yuan [in upfront investment].

"To achieve the shale gas production goal of 60 to 100 billion cubic meters by 2020, we would need to dig at least 20,000 wells. That's 2 trillion yuan. Is this possible?"

And there is no sign the wells needed to achieve these lofty goals are in the works. The director of the Shale Gas Department of the MLR Geological Survey Department, Bao Shujing, said at a conference in June that auctions planned for later this year would see 10 or fewer blocks go under the hammer, not the previously anticipated 23. The auctions would also be held later than anticipated, said Bao, at the end of the year at the earliest.

Tempting Reserves

The life spans and production cycles of shale gas developments are longer than those for conventional natural gas, at between 30 and 50 years. Stable production from an average single shale gas well, however, is only between 20,000 and 200,000 cubic meters per day, a far cry from the several million cubic meters yielded by conventional natural gas wells every day. Despite this, shale gas wells cost much more to develop.

The first shale gas well was dug in 1821, but high-scale commercial development did not begin until 2005. In 2011, shale gas daily production in the United States hit 182 billion cubic meters, 28 percent of the country's total natural gas production.

The world is paying close attention to North America's pursuit of energy independence. Low energy prices have helped to bail out U.S. industries such as chemical engineering. The U.S. shale gas story is particularly appealing to China, a nation whose rapidly growing energy demands outstrip it supplies.

A 2011 report by the U.S. Energy Information Agency estimated total world shale gas reserves that are exploitable using today's technology at 189 trillion cubic meters. Of that, 36.1 trillion cubic meters are in China, making it the world leader in shale gas reserves.

In 2011, the MLR launched an investigation into potential shale gas reserves. The results indicated China had 25 trillion cubic meters of developable reserves, slightly more than the United States' 24 trillion.

However, the lead geologist for state-owned chemical producer China Sinochem Corp., Li Pilong, said "the scientific nature of the data behind developable shale gas reserves is doubtful." Some experts hold there are really only 10 to 12 trillion cubic meters of developable shale gas reserves in the country.

An engineer at CNPC Southwest Oil & Gas Field Co. said that "we cannot continue development of the oil and gas industries based on quantity of resources alone, nor can the quantity of resources be used as a reliable basis for planning. There are too many indeterminate risks."

The MLR has put shale gas blocks up for auction twice, in 2011 and 2012. In 2009, a shale gas block in northeastern Yunnan Province was the first to be approved by the MLR for exploration.

Most shale gas exploration in the country is centered on the Sichuan Basin, the Ordos Basin, the Liao River depression and other areas. The director of the New Energy Bureau of PetroChina's Exploration & Production Co., Lei Huayu, said his company is planning to dig 122 horizontal wells between 2013 and 2015, of which 113 will start to produce gas by 2015. The company wants commercial shale gas production of 1.5 billion cubic meters in 2015, the final year of the latest five-year plan.

A Waiting Game

Four kinds of companies are exploring shale gas opportunities in China: traditional oil and gas companies like CNPC, Sinopec, CNOOC and Yanchang Petroleum; unconventional companies like China United Coalbed Methane Co. and Henan Coalbed Gas Co.; power companies like China Huadian Corp.; and local energy and urban construction investment platforms.

In the long term, the lion's share of oil and gas exploration in the country has been dominated by the Big Three state-owned oil companies: CNPC, Sinopec and CNOOC. Some 77 percent of the area for usable shale gas blocks and 80 percent of the resource potential are controlled by these companies.

The MLR has attempted to diversify the industry by auctioning off remaining shale gas resources to other companies. But CNOOC's Chen said the best blocks have already been taken over by CNPC and Sinopec, and major strikes are unlikely outside traditional oil and gas production blocks.

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