China Becoming Another Shale Gas Hot Spot
Over the last three years or so, the world has witnessed a bona fide revolution in natural gas development and production in the U.S. thanks to the shale gas revolution. And now China is pushing hard to exploit its own shale gas resources.
China, which recently became the world”s largest energy consumer, has very low natural gas consumption (about 4 percent of the country’s primary energy mix) while the worldwide average is about 23 percent. In a recent report, the International Energy Agency estimated that China has about 26 trillion cubic meters (about 900 Tcf) of shale gas resource, similar to the magnitude of U.S shale gas resources.
That’s a critical finding as China’s proven conventional natural gas reserves are fairly low, about 80 Tcf in 2009. The Chinese central government wants to increase the natural gas consumption from current 4% in the total energy mix to about 8% by 2015 and to 10% by 2020.
Major challenges lurk ahead if these goals are to be met. Although China”s domestic conventional gas production has been rising and recent discoveries have been very encouraging. Among them: Sinopec”s discovery at the Puguang field in Sichuan in March 2006, with proven reserves of 17.7 Tcf and then in June of 2006, CNOOC and Husky made the country”s first ever offshore natural gas discovery in South China Sea, with a preliminary estimated reserves of about 6 Tcf. Despite those discoveries, the gap between production and consumption has been getting bigger.
China has been one of the brightest spots in world LNG supply market and the country has been very assertive securing natural gas supply from central Asia countries.
However, to really help secure their natural gas supply in the long run, development of the potentially massive reserves of indigenous shale gas is an obvious choice for China. They hope to copy the recent successes of US operators and service companies. But China lacks the know-how and especially the ability to employ technology in a cost-effective manner, one that includes for example the use of very large numbers of hydraulic fractures in properly drilled and completed horizontal wells, the important suite of technologies that made shale gas development such a sensational success in the US during the last few years. Shale could present a big business opportunity for China (most likely CNPC and/or Sinopec) to team up with foreign oil companies to pursue this goal.
In November, during President Barack Obama’s first visit to China, he agreed with the Chinese to create a Sino-US initiative plan to accelerate shale gas development projects in China through joint technical studies and promote investment in China”s shale gas resources. This initiative could first help the Chinese to have access to the technology to explore and develop the shale gas and, on the other hand, it would help U.S major players, especially companies such as Chesapeake (almost exclusively engaged in the shale gas business recently) to enter the Chinese onshore shale gas resources, which have been tightly controlled, unlike offshore oil and gas which have been open to western oil and gas companies since the 1980”s.
Since the beginning of this year, both CNPC and Sinopec have been making some moves. In April, CNPC president Jiang Jieming, and one of his deputies Wang Dongjin, visited ConocoPhillips” Texas Barnett shale operation, stirring up speculation that CNPC may buy into U.S shale gas resources. Then in June CNPC signed an initial agreement with Encana (Canada”s major shale gas player). According to the agreement, CNPC will invest in Encana to gain some shale gas interests but, more important, CNPC is hoping to gradually gain technical skills in shale gas development technology.
Late last year, CNPC signed an agreement with Shell to jointly evaluate shale resources in Sichuan. The companies have since drilled an experimental well, collected core samples, and the analysis appears to be showing positive results. Sinopec also teamed up with BP late last year to jointly launch shale gas resources assessment in southwest of Guizhou province and east Jiangsu province. And on July 1, Sinopec announced that it has created its first “specialized project team” which aims to make breakthroughs in shale gas exploration over the next three years.
According to China”s Ministry of Land and Resources, the country’s first operational shale gas project will be located in Chongqing, Sichuan and it will come onstream sometime early next year. The ministry hopes shale gas production to reach 15 to 30 billion cubic meters per year (about 0.5-1 Tcf) by 2020, and to hit 110 bcm (about 3.8 Tcf) by 2030. If that occurs, shale gas could account for about 25% of China’s total gas production.
Such goals are not overly ambitious for the Chinese. Recent experience shows that once they set their mind towards something they often are successful.