China finds new shale gas prospects, plans further exploration

Wednesday, 02 January 2019
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Promising new shale gas prospects of a “substantial size” have been identified by China National Administration of Coal Geology (CNACG) both in Hubei and in Guizhou Province. CNACG will now develop the prospects, seeking to efficiently tap domestic unconventional reserves for the fast-growing Chinese gas market. 

A large reservoir of was found at the Xianfeng Jianshan block in central Hubei Province, CNACG announced, adding it also obtained positive results from test wells in two blocks in southern Guizhou Province. Further exploration will swiftly follow suit.

In view of clean energy development, CNACG completed the first round of coalbed methane parameter evaluation in China, revealing the shale gas reserves amounted to 35 trillion cubic metres. Geothermal explorations were carried out in deep and shallow formations in Beijing, Tianjin, Hebei, Shaanxi, Qinghai and other areas in Southwest China, and shale exploration and development in Shanxi, Shaanxi, Inner Mongolia, Ningxia, Xinjiang and Guizhou.

Guizhou Province emerges as a new centre for Chinese shale gas exploratory drilling. Two further wildcatters - Hong Kong-based Honghua and Shandong-based Jereh – have started drilling test wells in the Zheng’an block.

Rampant gas demand

Unabated energy hunger is what best describes the state of the Chinese economy. In the run- up to 2023, China’s gas demand is forecast to grow by 60%, and the country alone accounts for 37% of the growth in global demand, according to the International Energy Agency (IEA).

As a consequence, China’s dependence on imported pipeline gas and LNG surges, along with concerns about energy security. In recent years, China had purchase half of its gas needs from abroad, and imports are expected to reach 50% by the end of the decade. Developing domestic shale gas reserve help alleviate the risk of an over-dependence on foreign energy suppliers.

Deficit from 2020 onwards

Even though the actual volume of China’s shale gas production is unlikely to be a substantial new source of supply before the end of the decade, its price signal could be significant in the global market as Chinese buyers could use it in negotiations for imported gas.

LNG currently dominates China’s gas imports but this will change once Russia’s Power of Siberia pipeline comes onstream. The mega-pipeline alone will add 38 Bcm of gas supply, ramping up gradually by the middle of next decade.

But even this additional supply might not be sufficient. Neil Beveridge, senior analyst at Sanford C Bernstein research, noted: "Despite Russian gas, we see a growing gas deficit in the China market from 2020 onwards, with a 90 Bcm gap by 2030.”

Mind spiraling upstream costs

Even if China was able to meet its production targets this year, the actual gas volumes produced would come at more than double the cost of some of the bigger US plays.

At the Fuling block of the Sichuan Basin, developed by state-owned Sinopec, the wellhead cost at $11.20 per million British thermal units (MMBtu) is far above equivalent costs in the US, where producers can extract dry gas for as low as $3.40/MMBtu.

Average well costs at Fuling were cut from CNY 100 million ($16m) in 2012 to currently below CNY 70 million ($11m). US prices are still up to 75% lower: $9.3m in the Haynesville, $6.0m in the Marcellus, $3.3m in the Barnett and $2.6m in the Fayetteville plays.

China is still in the first stage and developers have failed to bring down extraction costs in order to make drilling shale wells profitable. China's two national oil companies, (CNPC) and China Petroleum & Chemical Corp. (Sinopec), are understood to have lost over US$ 1 billion in the course of drilling early shale gas wells.

To make domestic shale gas production attractive – compared to importing pipeline gas from Russia or LNG from Australia or the U.S. – the Chinese government needs to implement reforms along the gas value chain. Liberalization is needed all the way from upstream market entry to third-party access of gas transport infrastructure and the city gate pricing mechanism. 

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