China to become world’s 3rd largest gas producer

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With so much investment and strategic focus, China is gradually moving to becoming world’s third largest gas producer by 2027 even though her imports will still be growing in the long term. One key contributing factor according to Wood Mackenzie’s report will be lower forecast in domestic gas production particularly in shale gas and coal bed methane (CBM).

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“We have adjusted our overall outlook for China domestic gas supply down in our latest update. Production is expected to double from 149 billion cubic metres (bcm) in 2018 to 325 bcm in 2040, but this is 39 bcm lower than our previous outlook,” says Xueke Wang, consultant at the research institute.

“While we are positive on conventional and tight gas output, the long-term growth of CBM and shale production looks to be challenging,” explained Wang.

From almost zero growth in 2010, China went up producing 10 bcm of shale gas in 2018, or 7% of total gas production, with comprehensive costs per well in Sinopec’s Fuling field recording more than 40% cheaper than the initial exploration wells in 2010, after years of development, and about 25% cheaper than the first batch of commercial wells in 2014.

Noting however how hard it will be, even at the country’s three shale gas projects in the same basin which incidentally do not have the same economics, to replicate the success at Sinopec’s Fuling, due largely to geological heterogeneity.

The report also showed that shale gas from two gas-rich onshore basins – Ordos and Tarim would not be commercialized in the medium term despite well-developed infrastructure in the Ordos basin, for well yields are extremely low, primarily because of the inferior reservoir properties. Adding that few shale gas explorations have been carried out over the past five years in the Tarim basin, apparently with the desert environment and limited infrastructure posing some challenges nonetheless.

“To stimulate shale gas development, China has reduced resource tax on shale gas and urged NOCs to upgrade drilling plans. Sinopec plans to spend RMB60 billion (41% increase year-on-year) on exploration capex in 2019, with a substantial portion budgeted for Fuling expansion. Despite this, we have downgraded the long-term shale gas forecast to 88 bcm in 2040, which is 44 bcm lower compared to our H2 2018 view,” Wang was quoted as saying.

Meanwhile twenty-two CBM blocks have been offered for bidding to non-national oil company (NOC) players since 2017 though with slow commercialization around these blocks, firstly, offered blocks were of medium to low quality, but more importantly, the overlapping of mining rights between CBM and oil and gas obstructed development.

With lacklustre investment, CBM production stayed flat in 2018. With output limited by project economics, and technical and regulatory conundrums, CBM production is expected to reach 15 bcm in 2040, a 40 bcm reduction from Woods previous forecast.

Contrasting the research institute said tight gas, though also an unconventional resource, has become a core part of China’s gas mix, due to more mature technology, reliable geological data and overlapping distribution with conventional gas, which is also able to reduce infrastructure development costs.

The report stated that in 2019, China included tight gas in the new unconventional gas subsidy scheme for the first time, rewarding incremental growth based on subsidy-eligible volumes, thus, more capital investment in tight gas to be expected with potential commercialization of previously sub-economic and technically challenging tight gas reserves.

For the report, things are looking positive even on the conventional gas production front, for in 2018 according to Woods, domestic gas production increased by 7%, mainly from conventional plays in the Ordos, Sichuan and Tarim basins. It noted that China is pushing for more upstream E&P activities to enable reduction in her import dependence. Stating NOCs readiness through its newly formulated seven-year action plans (2019-2025) of raising budgets to stimulate upstream exploration.

“The overall reduction in China’s gas production outlook calls for greater need for imports in the long term despite a more modest demand growth rate. This should drive China’s growing appetite for LNG and hence influence global gas spot prices,” said Wang.

Gas demand is expected to reach over 673 bcm, accounting for half of Asia’s gas consumption by 2040.

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