16 |
Oilfield Technology
December
2014
to work collaboratively with its neighbours in South China Sea oil
and gas development.
15
Theshaleprize:morethan justFulingaround?
The successful development of a shale gas industry in China is seen
as key to curbing energy imports and to improving air quality. China
has huge gas reserves/resources, but much of those are more‑costly
unconventional resources, often located in remote and difficult areas.
Progress in shale gas development to date has been fairly slow. The
pace of activity picked up in 2013, with 60 shale gas wells completed, up
from 40 wells in 2012.
16
Sinopec has made the most progress with shale, particularly
so at its vast Fuling development in the Sichuan Basin. Sinopec has
drilled 79 wells at Fuling and expects to drill 100 more in both 2014
and 2015, aiming to have commercial shale gas production capacity of
5 billion m
3
/yr (~175 billion ft
3
) by 2015, and as much as 15 billion m
3
/yr
(~530 billion ft
3
) by 2020.
17
The wells have been relatively high cost (as
much as US$ 16 million per well), but Sinopec is confident that cost can
be reduced by half.
18
Other shale activity has included CNPC drilling 50 shale gas
wells in the Sichuan and Yunnan Basins, and it is expecting to drill 50
wells in 2014 and 60 wells in 2015, targeting production capacity of
2.5 billion m
3
(~90 billion ft
3
) by 2015 and 7 billion m
3
(~250 billion ft
3
)
by 2020. CNPC is thought to be more interested in tight gas, rather than
shale gas. The smaller regional player, Shaanxi Yanchang, has drilled
39 shale wells, while CNOOC has drilled four wells and numerous other
smaller companies have collectively drilled 117 wells.
19
IOC participation and critically, North American shale experience,
has been a key factor in China’s shale development programmes.
Since 2007, the two NOCs most interested in shale development,
Sinopec and CNPC, have together developed strategic relations with
nine IOCs to conduct joint shale gas studies and assessments, as
well as to conduct joint exploration and development operations, in
16 separate blocks or developments. Sinopec’s partners have included:
BP, Hess, Chevron, ExxonMobil, Total and ConocoPhillips. CNPC’s
partners have included: Newfield, Shell, Total, ConocoPhillips, Eni and
Hess.
20
The optimism around China’s shale gas prospects was undoubtedly
clouded however, by the announcement in early August that China’s
National Energy Administration (NEA) was drastically cutting
its shale gas production target for 2020 from an original goal of
60 to 100 billion m
3
(2.1 to 3.5 trillion ft
3
) to 30 billion m
3
(1.1 trillion ft
3
).
Consultants at Wood Mackenzie are even more cautious regarding
China’s shale gas potential, expecting growth to be slower and more
challenging, possibly reaching 12 billion ft
3
(about 425 billion ft
3
)
by 2020, with around one‑third of the total coming from Fuling.
21
Encouragingly, government policy incentives supporting shale gas
development have included:
22
Ì
Ì
Production subsidies of RMB 0.4/m
3
of gas produced 2012 to 2015,
reduction of/exemption from royalties, exemption from import
duties on shale gas equipment.
Ì
Ì
Classification of shale gas as a ‘new mineral resource,’ reducing
some regulatory burdens for exploration licenses and exploitation
rights.
Ì
Ì
Under the 12
th
Five Year Plan, giving rights to owners of oil and gas
mineral rights the right to explore for and extract shale gas.
Ì
Ì
Some reform of city gate gas prices – more closely pegged to
market rates.
Ì
Ì
Classification of the shale gas industry as a ‘strategic emerging
industry,’ making it eligible for certain financial support and tax
incentives.
Nevertheless, the principal challenges for shale gas in China include:
Ì
Ì
Deeper plays – typically 3000 - 5000 ft, compared to typical
US plays of 1000 - 3000 ft.
Ì
Ì
Remoteness and very difficult terrain in many areas.
Ì
Ì
Several densely populated regions, notably Sichuan.
Ì
Ì
Water intensity of shale development, with severe water supply
challenges in several areas, notably the Tarim, Ordos and
North China Basins.
Ì
Ì
Lack of/insufficient infrastructure (i.e., pipelines) in many areas
– distance frommarkets of many potential supply regions and
insufficient access to more attractive coastal markets.
Ì
Ì
Insufficient oilfield equipment and technical expertise; limited role
so far for the international OFS ‘majors’.
Ì
Ì
Complex supply chain logistics, particularly for water, but also
more generally in transporting supplies and equipment in difficult
terrains.
Ì
Ì
High well drilling/completion costs – typically as much
as two times more costly than a conventional Chinese gas well
and three times more costly than a US unconventional well –
and generally three times longer to drill. The cost disadvantage
will however, be somewhat offset by the fact that shale gas will
compete as the marginal gas supply with relatively high‑cost
imported pipeline gas (from Central Asia and presumably
after 2020 from Russia) and with high‑cost imported LNG.
Ì
Ì
Uncertainty around pace of price reform; the latest round of gas
price increases was announced in early August by the NDRC.
Ì
Ì
Limited participation of entrepreneurial private players, both
international independents and smaller Chinese companies.
Ì
Ì
NOC corporate structures are not particularly nimble or decisive,
with conditions likely to be somewhat impacted by recent
anti‑graft investigations.
China’s first two shale tenders were generally seen as
disappointments: the available blocks were generally seen as not
particularly attractive, bidding was limited to Chinese companies and
some of the successful bidders had very limited upstream experience.
A third shale tender had originally been scheduled for late‑2013, but
has been postponed and may be conducted in late‑2014. It is expected
to be open to Chinese companies, including companies with foreign
partners, and is expected to include some blocks close to higher‑quality
shale blocks in Sichuan. Different this time is that the bidding process
will be managed by local governments, rather than the MLR. Whether
this change will work to the benefit of private and/or foreign investors is
too early to tell.
23
However, despite sustained optimism in some quarters, particularly
from the two shale NOCs, Sinopec and CNPC, prospects of meeting
the revised target in 2020 still look uncertain. With the inevitable
distractions consequent upon the anti‑graft investigations, and given
that the international majors are generally tightening their capital
spending budgets, it may take some time before shale gas is a material
part of China’s energy mix.
References
1.
International Monetary Fund, ‘World Economic Outlook Database’, (April 2014).
2.
US Energy Information Administration, ‘China Analysis Brief’, (4 February 2014).
3.
EY analysis of data from Derrick Petroleum.
4.
US Energy Information Administration, ‘China Analysis Brief’, (4 February 2014).
5.
Oil & Gas Journal, ‘Worldwide Reserves and Production’, (December 2013); and
BP plc, ‘Statistical Review of World Energy 2014’, (June 2014).
6.
USEnergyInformationAdministration,‘InternationalEnergyOutlook’,(September2014).
7.
Ibid.
8.
US Energy Information Administration, ‘China Analysis Brief’, (4 February 2014).
9.
BNP Paribas, ‘China Oil & Gas – Accelerating Transformation’, (24 June 2014).
10. China Ministry of Land and Resources, as reported by BNP Paribas, ‘China Oil & Gas
– Accelerating Transformation’, (24 June 2014).
11. EY analysis of data published in EY’s Global Reserves Report, (September 2014).
12. EY analysis of data compiled by Derrick Petroleum.
13. Ibid.
14. Wood Mackenzie, ‘Shell signs first shale PSC in China’, (March 2013).
15. US Energy Information Administration, ‘South China Sea Analysis Brief’,
(7 February 2013).
16. BNP Paribas, ‘China Oil & Gas – Accelerating Transformation’, (24 June 2014).
17. China Ministry of Land and Resources, as reported by Paribas.
18. JP Morgan, ‘Sinopec Corp.’, (10 June 2014).
19. BNP Paribas, ‘China Oil & Gas – Accelerating Transformation,’ (24 June 2014).
20. Ibid.
21. Wood Mackenzie, ‘China halves 2020 shale gas target to 30 bcm’, (August 2014).
22. BNP Paribas, ‘China Oil & Gas – Accelerating Transformation’, (24 June 2014).
23. Forbes Asia, ‘China’s Coming Shale Gas Auction Offers Little Hope to Private
Investors’, (7 August 2014).
