All quiet on the Chinese shale front

1 September 2015
25-Aug-2015, Week 34, Issue 271

China is no longer talking up its shale potential as much as it used to. The country continues to make progress on developing its shale reserves but at a much slower pace than it initially expected, and amid a series of disappointments.

These include foreign investors stepping back from the country’s nascent shale industry, with ConocoPhillips confirming in late July that it had suspended all shale gas projects in China. The move, part of a global trend whereby oil and gas companies cut spending on risky, costly or challenging projects as a result of the low price environment, does not bode well for China’s long-delayed third shale gas licensing round.

Although there has been much speculation about when the third round will be held and what extent of foreign participation might be allowed, the global slump and the disappointing Chinese shale results so far make it likely that interest in new blocks will be low. Indeed, Chinese government sources reported early this year that Beijing was struggling to find attractive blocks to offer in a third shale gas round, which could be contributing to the delay.

State-run Sinopec and PetroChina are still the main players driving shale development in China. The companies have increased their production and started up pipelines from the only commercial shale gas projects in the country so far. But progress has been slower than the two companies would have liked.

In late July, Chinese media reported that Sinopec’s Fuling field, the most productive shale gas project in the country, was anticipated to produce 3.2 billion cubic metres of gas this year, down from an earlier target of 5 bcm. Fuling is thought to hold proven reserves of 107 bcm.

Producers are estimated to have drilled around 200 shale wells in China to date, so they are still a long way off from replication a US-style shale boom. In the US, over 100,000 shale oil and gas wells have been drilled so far.

Learning lessons

While they are struggling to attract foreign investment and expertise to China’s shale plays, Chinese companies have also been trying to acquire their own knowledge overseas, including in Canada and Argentina.

In 2012, PetroChina entered two shale projects in Canada. The company paid US$1.2 billion to enter into a joint venture with Encana in the Canadian firm’s Duvernay acreage in Alberta and also acquired a 20% stake in Royal Dutch Shell’s Groundbirch shale gas project in British Columbia. Canadian shale development has also been slow to take off, however, with the country’s shale gas resources currently stranded with a lack of access to new markets. Planned LNG projects that would use shale gas as feedstock and target Asian markets are still not guaranteed to proceed, and are years away from starting up.

Meanwhile, Sinopec is among those companies partnering with Argentina’s YPF to develop the country’s Vaca Muerta shale reserves. In Argentina, progress seems to be more rapid.

Whether the technical expertise gained overseas can be applied to China’s complex geology, though, is another question. The more shale formations are explored globally, the more apparent it becomes how variable they can be.

China’s shale formations have proved particularly troublesome for developers, given their frequently remote and geographically challenging locations, lack of plentiful water supplies and complex geological conditions. 

In addition to ConocoPhillips, super-major Chevron and Italy’s Eni have reportedly pulled out of the country’s shale scene in search of easier investment opportunities. The US’ Hess also exited the Malang shale oil block this year.

The continuing flow of downbeat news concerning China’s shale gas potential has forced the country’s energy planners back to the drawing board for the country’s third shale round.

Small value

Despite estimates that the country has the largest shale gas reserves in the world, at 25-31 trillion cubic metres, China has very little to show in terms of progress.

There have only been two major shale plays developed to date – Sinopec’s Fuling project and PetroChina’s development of the Changning-Weiyuan blocks in Sichuan Province. PetroChina’s parent, China National Petroleum Corp. (CNPC), said last week that Changning-Weiyuan was producing 3.62 million cubic metres per day of shale gas from 47 wells.

The problem lies in the fact that the country’s top two national oil companies (NOCs) are understood to hold almost 80% of China’s shale gas exploration acreage, even though they have a history of prioritising conventional or tight gas projects over shale drilling.

At the same time, this dominant position has left very little promising acreage for private investors, Sino-foreign joint ventures or even other smaller state-run energy players.

Indeed, China’s first two shale gas auction rounds have been far from successful. The first round in 2011 was limited to state-backed bidders and saw just two blocks awarded, while the second in 2012, which was opened up to private investors, attracted winning bids from 16 firms that had zero shale experience.

At the start of the year Reuters quoted a source involved in evaluating the blocks as saying that just eight exploration wells had been sunk across 19 blocks.

These figures have seen Beijing’s energy planners repeatedly delay the third round, originally to be held in late 2013, with no definite timeline seemingly in mind.

What next?

While the Chinese Ministry of Land and Resources (MLR) has struggled to find suitable acreage to sell, a recent shift in upstream policy suggests a change on that front could be nigh.

The MLR is in the process of holding the government’s very first onshore licence tender. Six Xinjiang blocks, stripped from PetroChina and Sinopec after they failed to meet their exploration and investment commitments, are being offered to private investors, including Sino-foreign joint ventures. It is a small step, but possibly an important one.

Beijing is aware that encouraging private investment in the unconventional upstream sector will have to be led by the central government, rather than relying on its state majors.

The NOCs are focused on delivering high-profile shale gas successes, such as Fuling, rather than tackling more challenging acreage. While a handful of major projects are central to proving China’s shale gas potential, they do not represent the many thousands of wells that need to be drilled in order to bring on line the levels of shale gas production China has repeatedly said it expects within the next 20 years.

The US’ shale boom was created by smaller and more nimble developers that began work on cracking the code of commercialising the country’s shale reserves years ago. This is what China needs if it is ever to unlock its own shale gas potential.

It seems likely, therefore, that Beijing will become more aggressive in seizing back promising but neglected unconventional plays in more challenging areas such as in Xinjiang while leaving the NOCs to continue developing projects in the prolific gas-producing Sichuan Basin.

Edited by

Anna Kachkova

Editor

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