BP Bows Out of Fracking in China

BP PLC is set to stop drilling for shale gas in the southwestern province of Sichuan, becoming the latest international oil major to quit such a project in China.

The British oil company will formally announce the move after holding a meeting with its local partner China National Petroleum Corp. (CNPC) to negotiate exit terms, multiple sources familiar with the matter told Caixin.

In March 2016, BP signed a production sharing contract (PSC) with CNPC for shale gas exploration, development and production in the Neijiang-Dazu block of the Sichuan Basin. And months later, it signed a second PSC deal for shale gas exploration in the province’s Rongchangbei block.

BP is joining other international oil and gas giants including Exxon Mobil, ConocoPhillips, Royal Dutch Shell and ENI, that have stopped fracking — which refers to the use of high-pressure liquid to blast through rock to extract oil or gas — for shale gas in China.

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"We understand that both poor well performance and challenging above-ground conditions contributed to BP's decision,” said Xianhui Zhang, an analyst at research firm Wood Mackenzie. “Such difficulties … highlight the unique challenges of developing shale gas in China. These include complex and deep reservoir geology, low well productivity, marginal economics and infrastructure constraints.”

Earlier last month, BP Chairman Helge Lund said in an interview with Caixin that the company is “carefully” developing projects in China.

Last week, BP CEO Bob Dudley told Caixin that the Sichuan projects faced “great challenges” because of the complex geology of the region. Unlike the U.S. shale reserves that have driven that country’s energy revolution, China’s tend to be located much deeper underground and in less accessible, mountainous regions.

BP used fracking technology from its shale developments in the U.S. for the Sichuan projects, according to CNPC.

With BP bowing out of China, the country’s shale gas sector will be further dominated by two large state-owned energy companies — CNPC and China Petroleum & Chemical Corp. In 2018, China produced a total of 10.8 billion cubic meters (381.3 billion cubic feet) of shale gas. A government plan for the sector aims to have production hit 30 billion cubic meters by 2020.

David Kirton contributed to the story

Contact reporter Mo Yelin (yelinmo@caixin.com)