China turns increasingly to unconventional energy production such as shale gas

Local governments, under pressure to tackle chronic air pollution problems, are turning to shale gas to meet future energy demands

PUBLISHED : Friday, 22 November, 2013, 11:00pm
UPDATED : Saturday, 23 November, 2013, 4:40am

In the vast, arid plateau of northern China, energy giant PetroChina and its European partner Royal Dutch Shell are busy drilling wells thousands of metres underground. They hope to assess if it's possible to expand production at the Changbei gas field in Shaanxi province.

Producing 3.3 billion cubic metres of gas a year, Changbei supplies 40 per cent of Beijing's gas consumption. And more is needed: Beijing hopes to replace coal with gas to combat chronic air pollution that routinely chokes residents and pumps dangerously high particulate matter into the air.

Natural gas is the fastest-growing form of fossil energy on the mainland, where local governments are under pressure to replace sulphur, nitrogen and carbon emission-prone coal with cleaner-burning alternatives. But reserves of conventional gas - which can be extracted by drilling a single well through the earth's surface - are increasingly hard to obtain. This is because China has only 1 per cent of the world's proven conventional gas reserves, and production has surged faster than producers can find new reserves.

Energy companies are now tapping so-called unconventional reserves - shale, coal bed methane and a product called tight gas, all of which cling more strongly to rock, sandstone and coal seams and are therefore more difficult to extract than conventional gas.

Mainland China is believed to have the world's largest shale gas resources - as much as 36.8 trillion cubic metres, 50 per cent more than those in the US, according to the US Energy Information Administration.

"Shale is transforming the global energy industry," writes senior analyst Neil Beveridge of US brokerage Sanford Bernstein in a research report. "Through horizontal drilling and stimulation technology, which has opened up commercial production from shale, the global gas resource base has effectively doubled."

While shale gas production in the US has become a huge commercial industry in the last few years - worth US$29.4 billion in 2011 - its development in the mainland faces some tough challenges.

Extracting shale gas consumes vast quantities of water, and water is scarce in much of the mainland regions rich in gas resources, particularly in northern and northwest China. Environmentalists and some mainland residents worry that the water and chemicals used to fracture rock will drain water supplies and cause sandstorms.

Li Xiaoli, deputy director of the National Development and Reform Commission's Energy Research Institute, wrote in a research paper earlier this year that fluids and chemicals used to fracture rock formations - including toxic substances - could contaminate ground water.

A preliminary investigation by the US Environmental Protection Agency two years ago linked hydraulic fracturing - commonly referred to as fracking - with underground water contamination. The process has split communities in America; most small towns welcome the jobs that fracking has brought. However, some landowners say it has tainted wells and left animals sick.

"China should speed up enhancing the regulatory and legal systems on the environmental impact of oil and gas development, and devise regulations on shale gas development," Li wrote.

Tight gas is found widely in the mainland's sedimentary basins, some of which is already being commercially produced. It is more difficult and costly to retrieve than conventional gas because it clings inside small pores in sandstone structures. By contrast, conventional gas co-exists with crude oil or exists by itself in a reservoir, and can be pumped with relative ease.

Extracting tight gas - which may total 12 trillion cubic metres in the country - involves the drilling of multiple wells deep underground that are nearly horizontal to the earth's surface. This expands the surface area for gas to flow above ground. Water mixed with sand and small amounts of chemicals are then shot through the wells at high pressure, fracturing the sandstone to free up trapped gas.

Oddly, the gas hunt was sparked years ago partly because of the 2008 Beijing Olympics. The city was eager to find alternatives to coal burning, which causes smog and increases cancer rates. In 2009, the United Nations said the city's US$17 billion pre-games environmental clean-up diminished air pollution far beyond what most observers had expected. But that did not last. Beijing recorded its highest number of smoggy days since 1961 in the first 10 months of this year, making fighting air pollution one of the top priorities for the central government.

Faced with pollution problems in major cities, the central government has encouraged companies to find hard and expensive-to-reach unconventional natural gas reserves, awarding subsidies and allowing private firms to join the search.

The mainland's three state-backed oil and gas companies - PetroChina, China Petroleum and Chemical Corporation (Sinopec) and CNOOC - have signed pacts with around seven international energy majors to study and explore for shale gas. Shell and PetroChina have been drilling appraisal wells in Changbei to assess if it's possible to extract gas that is trapped even deeper in sandstone than reserves that have already been tapped.

Other companies have joined the hunt. One Sino-foreign joint venture links PetroChina with France's Total, which began production in the South Sulige area in northern Inner Mongolia last year. PetroChina also invited Shell and Total to help it develop tight gas in the Ordos Basin in northern China.

Shale gas production in the US has achieved commercial success in the last few years, lifting domestic gas output by 20 per cent in the past five years and pushing prices to 10-year lows, enabling companies to export the surplus. But mainland development has only just begun. Analysts and industry executives say it will take a few years for shale gas production on the mainland to reach the commercial production stage because of several disadvantages facing the industry.

Drilling one shale gas well requires the injection of 10,000 cubic metres of water, says Wang Jinlong, chairman of Shenzhen-based oilfield services provider Termbray Petro-King Oilfield Services.

In the southwest, another shale gas-endowed area, hilly topography and high population density have made moving bulky drilling equipment difficult. Companies have found they needed to compensate residents to use their land.

Since the per-well output of unconventional gas is much smaller than that that of conventional gas, many more wells need to be drilled to justify cost. This means companies need to work over a greater stretch of land than when they drill for conventional gas.

In July, Petro-King helped Sinopec drill an exploratory well near Chongqing amid a drought in the southwest. His firm waited one month for a water pipe to be installed.

"Luckily Sinopec had anticipated the challenge and in April started building a water pipe that stretched more than 10 kilometres to draw water from the Yangtze River," Wang says. He declined to state how much the pipe cost.

"But in my opinion, water is not that big an issue,'' Wang says. "What is more challenging is the hilly conditions that require up to 10 million yuan (HK$12.6 million) to be spent to haul the equipment and level the ground for drilling rigs to be installed."

Despite environmentalists' fears, the possibility of contamination is small since shale rocks are generally located much deeper than water aquifers and there are many non-permeable rock layers between water aquifers and shale rock formations, according to the National Development and Reform Commission and the National Energy Commission.

More complicated underground geology also makes drilling challenging.

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. Many of these faults are tectonically active, Daiwa reports, quoting Advanced Resources International, an American unconventional gas industry consultant.

Oliver Wang Guoqiang, chairman of Beijing-based SPT Energy Group, which helps firms like PetroChina construct and drill wells, says underground fracturing should not be strong enough to cause strong earthquakes, although he is not aware of any scientific study on this.

Mainland development has also been slowed by a lack of exploration by private companies, which are often more willing to tackle exploration risks than state firms, said Daiwa.

And unlike in the US, mainland landowners lack underground resource ownership rights, which would allow them to collect royalties from resource developers. This means mainland land occupiers are reluctant to let resource firms drill on their land unless forced to do so by the government.

While drillers are working hard on unconventional gas development, energy firms have identified an alternative way to produce gas - from coal.

Given China has the third largest coal deposits in the world, energy companies are hoping that depressed coal and steel prices and rising gas prices will mean that coal to gas will be the next big bet. A UBS research report estimates that more than 400 billion yuan will be poured into 19 coal-to-gas projects with total output capacity of 55 billion cubic metres by 2020.

Sinopec is leading a consortium to build a 20 billion yuan project to turn coal in the remote Xinjiang autonomous region into natural gas, by exposing the coal to steam and oxygen in enclosed chambers under high pressure and temperature.

The process produces synthetic gas comprising mostly carbon monoxide and hydrogen, which is then processed to make natural gas or methane, beside other saleable by-products.

The gas will be piped from Xinjiang to Guangdong and Fujian province through 7,373 kilometres of above-ground pipelines.

Two smaller projects are being built by Datang International Power Generation to convert coal to gas in Inner Mongolia and Liaoning province to meet rising gas demand in Beijing and Liaoning.

Both PetroChina and Sinopec have reported successful drilling results from dozens of exploration wells drilled in the past couple of years. But more test wells will have to be drilled to determine if the gas production quantities will be stable and therefore justify commercial production.

Petro-King's Wang says given good drilling results so far, the first two commercial-scale pilot projects led by PetroChina and Sinopec in Sichuan and near Chongqing should start mass production next year. He believes Beijing's goal for the nation to produce 6.5 billion cubic meters of shale gas in 2015 should be met by the newly emerging industry.