Sinopec leads China's shale gas revolution with successful drilling

Drilling at Chongqing field is significant but now the industry needs to try to emulate the United States' fracking success in recent years

PUBLISHED : Thursday, 24 April, 2014, 1:15am
UPDATED : Thursday, 24 April, 2014, 2:37am

China Petroleum & Chemical (Sinopec)'s discovery of the Fuling field in Chongqing may have set a milestone for the mainland oil and gas industry's "shale gas revolution", but the industry's success in meeting the nation's 2020 production target and emulating the success of the United States is not guaranteed.

This is because drilling completed at the Fuling project is not sufficient to prove that the initial drilling success will be replicated in a much wider area beyond the 200 square kilometre pilot zone, analysts said.

"The Fuling shale is unquestionably the best shale discovery in China to date and arguably one of the best outside North America," said American brokerage Sanford C. Bernstein senior analyst Neil Beveridge in a report. "[But] Fuling is relatively small and may not be representative of the Sichuan basin more broadly. China's shale revolution is still likely to be a long drawn out affair compared with the US."

Sinopec chairman Fu Chengyu late last month delivered at a press conference what investors like to hear: a timetable for Fuling's production capacity construction - five billion cubic metres (bcm) annually by the end of next year and 10 bcm by 2017. The firm had targeted two bcm by 2015 two years ago.

The new target is significant given Fuling is the nation's first commercial-scale shale gas project. Sinopec - the nation's second largest oil and gas producer - last year produced 18.7 bcm of gas from conventional methods.

"Fuling should be considered China's first large-scale shale gas field, marking the arrival of commercial shale gas development," Fu said.

Rival PetroChina, whose 79 bcm of gas output last year accounted for two-thirds of national output, is aiming for 2.6 bcm of annual shale gas production in 2015, higher than 1.5 bcm indicated earlier. It has been conducting trial production mainly in Sichuan province.

A Reuters report quoted a company source and a government source as saying PetroChina plans to spend more than 10 billion yuan (HK$12.55 billion) on shale gas drilling this year alone, compared to three billion yuan between 2010 and last year. A company spokesman said spending would rise, but would not confirm the figures, adding: "The actual spending will depend on the results. If efficiency is good, we will increase outlays. Otherwise, we will stick with trial exploration."

Together, the two oil and gas giants should comfortably reach or surpass the 6.5 bcm shale gas output target set by Beijing for 2015. But meeting the government's 60 bcm and 100 bcm target for 2020 will be challenging. Credit Suisse's analysts said in a research report that the 2020 target was likely derived from the growth trajectory in the US between 2006 and 2012.

Xinhua on Tuesday quoted PetroChina vice-president Sun Longde as saying it is targeting 11 bcm of shale gas output in 2020.

Shale gas adheres tightly to rock formations. Although it is similar to natural gas produced by conventional methods, its commercial production was made possible only around six years ago in the US thanks to fracking where water and chemicals are injected at high pressure so the gas can be released.

China was believed to have the world's largest shale gas resources of 36.8 trillion cubic metres, 50 per cent more than those in the US, according to the US Energy Information Administration (EIA). China's Ministry of Land and Resources' estimate is 30 per cent less than that of the EIA.

Energy industry executives have long pointed to low natural gas prices, water shortages, underdeveloped gas pipelines and a dearth of advanced technology as reasons why China's shale gas development will be slower than in the US. They also pointed out that China's geology is different from that in the US.

Unlike the US, where shale layers are simple and uniform, China's shale layers, like those in Europe, are heavily faulted, according to a Daiwa Securities research report. This means rock formations are deformed as a result of underground movements. Only short horizontal sections can be drilled, incurring higher drilling costs. According to Fu, mainland shale gas is also trapped deeper underground, which further raises costs.

Fu said Sinopec has so far invested two billion yuan on shale gas drilling, and has found an estimated reserve of more than two trillion cubic metres in an area of some 4,000 square kilometres. Well construction costs have already fallen to 80 million yuan each from 100 million yuan earlier due to larger-scale operations, he added. Sinopec has drilled 21 shale gas wells so far.

Beveridge estimated the Fuling gas field to be worth some US$2.5 billion, adding Sinopec's management expected the per-well drilling cost could fall to 50 million yuan as the scale of development increases further.

He noted that while even this projected lower drilling cost is higher than in the US, mainland shale gas prices can reach almost double the US price in the spot market with the subsidy from Beijing thrown in.

"While the average well costs in [Fuling] is much higher than most shale wells in North America, the initial production rates appear to be higher," Beveridge said. "Bringing costs down will be a key challenge for shale development in China, which we think will ultimately be successful given the industry's scale and manufacturing capability."