China Shale Gas Targets Elusive Despite Demand

The Shale Gas Revolution that transformed America’s energy industry overnight in reality was a story more than two decades in the making. So it’s no wonder China, years behind in shale exploration, is just now ratcheting up its shale business as well. For China, the world’s largest energy consumer, it’s a matter of national pride as well as national health concerns.

Even as China continues to increase its target for natural gas production, it is continually daunted by technological insufficiencies  and now price reductions. Still, China is determined to stay the course to clean natural gas production as it looks to reduce pollution levels from its many coal-fired plants.

Huge shale gas deposits – Difficulty keeping up with demand

2013 estimates by the EIA show that China has the world’s largest recoverable shale gas resources. Estimated at 31.6 tcm, that’s nearly as much as the United States and Canada combined. In fact, China has invested already more than $1 billion in new shale gas exploration, completing as many as 20 horizontal wells by the end of 2013. While the Chinese are moving forward, they are still well behind the US which according to Baker Hughes currently has 1020 unconventional natural gas wells. (Shale gas already produces the majority of all natural gas production in the US.)

While China did produce more than 117 bcm of natural gas last year, it’s important to note that only 0.2 bcm of that came from unconventional sources. This doesn’t bode well for the world’s largest consumer of energy. Domestic gas consumption is increasingly rapidly in China and because of both technological and pipeline restrictions, the country became a net importer in the year 2009. While production increases at an annual rate of 9.3 percent, Consumption is rising at more than double the rate, or 19.1 percent.

Doubling down

Under the new 5-year plan, China has set a target of doubling its domestic production of natural gas. By the year 2020, China is looking to produce anywhere from 60 to 100 bcm of natural gas annually. The move comes as China tightens environmental controls, looking to reduce its number of coal-fired plants and replace them with cleaner burning natural gas. Right now, coal accounts for 70 percent of all energy production in the country.

Unfortunately, recent targets now seem more elusive than ever.  Wu Xinxiong, director of China’s National Energy Administration, recently lamented that only 30 bcm per year would come online by the year 2020. If that holds true, that amounts to just 1 percent of all the domestic need.

“The previous targets were more of a vague prospect, a hope,” says a government official. ” Thirty bcm is a more realistic goal.”

In fact, of the two largest oil companies in China, just one, Sinopec, even has a shale gas operation currently in production. While Sinopec estimates production to double in its Southwest Sichuan field from 2015 to 2017 (to 10 bcm per year), that hardly makes up for the lack of gas wells set to come online.

Natural gas imports on the rise

Domestic production failures have led to an increased reliance on imports. Right now China imports an estimated 18 million tons of LNG per year. Compare that to just 3.3 million in 2008 and you can see how stark the discrepancy. LNG imports are up by 29 percent alone this year with China now the world’s 3rd largest LNG market.

China has now accepted the fact that the need for increased production means increasing foreign investment as well. China instituted its first gas-price increase in three years in 2013 in hopes of raising funds to bring in foreign investment. Right now, however, just Royal Dutch Shell and the Hess Corporation have secured production-sharing contracts.

“In essence, incremental supply above 2012 contract volumes will be priced in a range from $13-$15 mmbtu,” says a recent ANZ Research report.  “This should reduce the losses on oil-indexed imports, and encourage the flow of capital into domestic unconventional gas exploration and development.”

Pipeline insufficiencies also a big problem

The lack of wells is not the only problem China has to deal with. Even if the country had an increased number of production, there is the real problem of having to get it to the refineries. China has only 45,000 kilometers of natural gas pipelines currently in use. While the country has launched an aggressive new program to double that, still it pales in comparison to the United States which currently has an estimated half million kilometers of natural gas pipelines. That’s almost enough to go to the moon and back.

One of the problems with the pipelines is that the entire system is owned and operated by the government. The lack of private enterprise to be involved in the construction of pipelines has certainly stunted growth in the industry.

“Private ownership makes it easier for land transfer or leasing. It is no coincidence]that the U.S. shale gas revolution mainly took place on privately-owned land,” Chou said. Although China’s Development Plan for Shale Gas (2011-15) gives developers priority when applying for a land-use permit, it has yet to solve the problem.

Looking ahead for China and shale gas production

While China is ever increasing its use of natural gas, the outlook for shale gas production is not an expedient one. Hurdles like the cost of drilling each well pad (estimated at $11 million each, twice that of here in the US), as well as tight government restrictions on water resources and land rights, mean the path to increased domestic productivity will be a long one.

“The shale gas revolution that swept across the US is unlikely to repeat in China by 2020, particularly because of the water resource and land rights bottlenecks,” says analyst Ella Chou. “China should be realistic about its shale development outlook and commit to take effective actions to address the various environmental, technological and regulatory challenges.”

Estimates for China shale gas production are just 5 bcm and 10 bcm by the years 2015 and 2020 respectively, well below previous targets.

…original content by PPE