For and Against: The case for Chinese shale

12 February 2018
12 February 2018, Week 05, Issue 679

NewsBase editors Anna Kachkova and Andrew Kemp debate whether Beijing’s 2030 target for shale gas production is achievable. 

What: China’s aim to produce 80-100 bcm of shale gas by 2030 hangs in the balance.

Why: Recent production growth is weighed against prohibitive costs and limited commercial projects.

What next: If drillers don’t move to new shale projects, Beijing may have revise its target to 60 bcm.

The case for: Chinese shale gas production targets increasingly realistic

China’s shale industry is overcoming early disappointments and showing that government production targets are within reach, writes Anna Kachkova

What: China looks increasingly likely to meet its shale gas production target of 80-100 bcm by 2030.

Why: Recent production growth illustrates a breakthrough for China’s shale industry.

What next: Chinese shale drillers will increasingly shift their attention to new shale projects.

China’s shale industry had a slow and disappointing start, but is rapidly turning this around, with Beijing’s 2020 and 2030 output targets now moving within reach.

The Chinese government has set goals of 30 bcm per year of shale gas production by 2020 and 80-100 bcm per year by 2030. While these are reductions of earlier targets, they remain ambitious but also increasingly look realistic.

On the up

The country’s shale gas production surged in 2016, with the Chinese Ministry of Land and Resources saying it reached a record 7.9 bcm, marking a year-on-year increase of 76.3%. National data for 2017 have not yet been released, but both the companies driving shale development in the country, PetroChina and Sinopec, have reported further strong output growth at their shale projects.

PetroChina said in early January that it produced around 3 bcm of shale gas in Sichuan Province in 2017, which parent company China National Petroleum Corp. (CNPC) estimates will account for around a third of the national total. PetroChina has also set a target of 5.1 bcm of shale gas production in 2018, which would mark a 70% increase on output in 2017 if it is achieved. With the company planning to bring 400 new wells online in Sichuan this year, such explosive growth seems like a reasonably predictable outcome.

Sinopec, meanwhile, said the Fuling project – its most prolific shale development – yielded over 6 bcm of gas last year, marking a 20% increase year on year. In mid-2017, the company raised its estimate of Fuling’s reserves by 58% to 600.8 bcm from the 380.6 bcm it had announced three years prior.

Production push

While Fuling, along with PetroChina’s Changning-Weiyuan, accounts for the bulk of China’s shale gas production to date, efforts are now being made to tap new regions, both nearby and further away. Last year, Sinopec made a shale gas discovery in Chongqing City, about 150 km from Fuling. Its Dingye 4 flowed 205,600 cubic metres per day, showing that the Dingshan structure holds shale gas, and the company said this level of flow was big enough to declare the discovery commercial. More recently, the China Geological Survey (CGS) said recently that it would carry out a survey of shale gas potential in the River Yangtze Economic Belt, while a pilot production operation would also go ahead in Hubei Province.

This comes after the CGS announced the discovery of a major shale gas reservoir near Yichang in Hubei Province in July 2017, saying it estimated reserves there to be above 500 bcm. And new projects will benefit from the expertise that Sinopec and PetroChina have acquired while focusing on their main shale ventures, where breakthroughs in drilling techniques have led production to boom recently. Given that China is estimated to hold the world’s largest shale gas reserves, at 25.1 tcm, Fuling and Changning-Weiyuan account for only a fraction of its potential.

Indeed, given that Sinopec is planning to raise output at Fuling to 10 bcm per year by 2020, shale gas output from other projects will be needed to meet Beijing’s 30 bcm target for that year. And it seems that this is what is now being pursued, with an eye beyond 2020 to 2030 targets.

What next?

Sinopec’s push in and near Fuling is set to be boosted by the local Chongqing government, which intends to invest 150 billion yuan (US$23.8 billion) to help boost production in the region to 20 bcm by 2020.

Any future increase in natural gas prices would also bolster Chinese shale output, as costs have been one of the industry’s major hurdles to date. But even in a low price environment, the country’s shale producers have substantially reduced the cost of shale production, paving the way for cheaper developments to follow in the coming years.

Another development that bodes well for Chinese shale is the entry of super-major BP, which started drilling at the Neijiang-Dazu shale gas block in Sichuan in September, with work at the Rong Chang Bei block expected to follow by early 2018. BP has production-sharing contracts (PSCs) in place for the two blocks with CNPC. The super-major’s presence is a welcome one after other foreign players including Hess, Chevron and Royal Dutch Shell pulled out of China’s nascent shale gas industry. It is also another factor that could help CNPC acquire know-how and technology for more efficient shale drilling.

With a number of new projects only now starting up, there is still ample time for Chinese shale producers to tackle geological, technological and infrastructural challenges before 2030, raising productivity to levels required to meet Beijing’s goals. The growth achieved in the past two years shows that China has broken through a barrier in its shale development, and while reaching the upper end of its 2030 target range still looks too ambitious, hitting 80 bcm per year by that date appears increasingly possible.

The Case Against:

China Must Lower 2030 Shale Gas Targets

Beijing reduced its original shale gas production target for 2020 and needs to do the same for its 2030 figures, argues Andrew Kemp

What: China’s production target of 80-100 bcm by 2030 is unrealistic.

Why: The cost of shale gas production is prohibitive, while the number of developers and commercial projects is limited.

What next: China will likely lower its 2030 target to a more realistic figure of 60 bcm within the next few years.

While China has a chance of hitting its 2020 shale gas production target, its 2030 forecast remains little more than a set of aspirational numbers.

The central government wants 30 bcm per year of shale gas production by 2020 and 80-100 bcm by 2030. Beijing’s first target is more achievable than the initial 60-100 bcm touted in 2012 and has given both state-run Sinopec and PetroChina, the backbone of the Chinese shale gas sector, a realistic ceiling to aim for. But the government’s 2030 figures appear hopelessly unrealistic, given local geological complexities, the limited number of foreign majors testing Chinese shales as well as the continued high cost of development.

Beijing has a track record of setting aspirational goals for its unconventional gas sector before backtracking, first for coal-bed methane (CBM) and then for shale gas, and it would not be surprising to see a revision of the state’s 2030 shale gas goals in the not too distant future.

First lessons

China’s preoccupation with delivering more gas from domestic sources to meet ever expanding demand has driven it to tap a range of unconventional gas sources – including shale, CBM, methane hydrates and synthetic gas (syngas).

The CBM sector was the first to gain the state’s eye, with Beijing providing production subsidies that helped support growth, but not to the extent the government had hoped.

CBM developers, including private and state-run players, have struggled to match Beijing’s lofty ambitions. In 2015, producers delivered 18 bcm of the 30 bcm Beijing had set out for the end of its 12th Five-Year Plan (FYP, 2011-15). In 2016, the government lowered its target for the 13th FYP (2016-20) from 30 bcm per year to 24 bcm. 

The early days of the central government’s excitement for shale gas was driven by the US shale gale, which turned the North American country into the world’s largest gas producer in 2009 and left Beijing eager for its own success story. After all, the Asian giant has the world’s largest shale gas reserves at 25.1 tcm. But replicating the successes seen in the US has been incredibly difficult for Chinese developers and the government was forced to trim its 2020 production target lest it look foolish.

The past eight years of evaluations, auctions and drilling have yielded just two notable production zones – Sinopec’s Fuling and PetroChina’s Changning-Weiyuan developments, both located in the Sichuan Basin. The problem, as ever, is to do with money.

High costs

Official figures emerged a few years ago that seemed to suggest that China was bringing down the sky-high costs of developing drilling techniques for indigenous shales, which are deeper and more complex than those in the US. While reserves at prolific US shale plays can be found just 1,600 metres below the surface, Chinese formations in the Sichuan Province can be up to three times as deep.

Research published by China National Petroleum Corp. (CNPC) in 2015 showed that drilling costs had been reduced by as much as 23% from the level Sinopec had reported just two years earlier. But just last week Sinopec said that without state subsidies its shale gas operations could enter the red.

“If without government subsidy, our shale gas business is on the verge of being loss-making,” Sinopec vice president Ma Yongsheng told Reuters. The full cost of producing 1,000 cubic metres of gas at Fuling was around 1,100 yuan (US$174.88), Ma added.

The executive’s point that subsidies were all that prevented the company’s shale operations from making a loss is far from reassuring when considering the state of the wider industry. Sinopec is China’s leading shale gas producer, having produced around two-thirds of the country’s 9 bcm in 2017. If the major can barely break even after years of development and assumed technological breakthroughs at its flagship Fuling field, the odds for other upstream players are far from favourable.

Cut and run

Indeed, Royal Dutch Shell backed out of Sichuan’s Fushun-Yongchuan shale gas block in 2016, noting: “There is no follow up investment that can be justified.”

In 2015, ConocoPhillips ended talks with listed CNPC unit PetroChina on a two-year shale gas development study, saying: “The right commercial decision was to halt further discussions on this block.”

China held two national shale gas auctions in 2011 and 2012 respectively, with drilling results so disappointing that the government refrained from holding a third round altogether. It shifted tack last year and opted to decentralise shale gas auctions, allowing provincial and regional governments to manage the process.

The country has a dearth of major developments to hand, with Fuling and Changning-Weiyuan repeatedly cited as the key to China’s shale gas future. But two production sites do not make a shale gas revolution. Moreover, China has a plethora of other gas supplies undermining the case for costly shale fields – beyond the inevitable energy security argument. But the energy security case is not as compelling as it once was, with the argument losing out to commercial sensibilities in the crude oil sector just recently. China may well see its crude import dependency creep up to a record-breaking 70% this year.

Shale will join conventional, tight, coal-bed, synthetic and imported gas as part of a wider domestic supply picture. But whether it can become the pillar of production that the 80-100 bcm per year target represents by 2030 is another matter altogether. Given the financial and technical challenges facing the sector, Beijing will likely revise down the 2030 figure to around 60 bcm within the next five years.

 

Edited by

Anna Kachkova

Editor

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