China’s shale gas boom not expected soon – Dr. Yang

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Shale gas in China, according to Wood Mackenzie, has seen significant progress in the last decade, growing to nearly 600 wells and 9 billion cubic meters, bcm of production in 2017, and by its projection would almost double to 17 bcm by 2020. What does this portend to countries whose supplies have been tied to China’s gas market?

Pushing production currently Wood says, are Sinopec’s Fuling, and PetroChina’s Changning-Weiyuan and Zhaotong projects which sit in the mountainous terrain of the Sichuan Basin. Nearly 700 new wells are billed to come onstream between 2018 and 2020 from the three projects combined, with a total capital investment of US$5.5 billion.

Notwithstanding, China, Wood Mackenzie believes, will still miss its 2020 30-bcm production target announced in its 13th energy sector five-year plan by a considerable margin.

“China is eager to materialize its shale gas potential to fuel its massive gasification initiative and support rising demand growth,” Dr. Tingyun Yang, consultant, Wood Mackenzie explains.

“In order to meet the government’s 30-bcm target, up to 725 additional wells are needed by 2020 on top of the nearly 700 new wells. This will double the amount of investment needed in the base-case drilling plan. The required well number could be larger if well productivity degrades. This is a mammoth task for the Chinese NOCs (national oil companies).”

“The speed of shale development will impact global gas markets. Considering the impact of shale gas production on domestic demand, the 2020 13-bcm ‘gap’ will have to be filled by imports, in particular LNG,” added Lynn-Yuqian Lin, consultant, Wood Mackenzie. “We have already witnessed how China was able to leverage on flexible LNG to cope with record-high demand this recent winter season.”

“The good news for Chinese shale gas is well costs have gone down considerably – 40% for exploration wells compared to 2010 levels, and 25% for commercial wells compared to 2014. Chinese NOCs are starting to get their shale game plan together,” said Dr. Yang.

For Woods, it took the US more than three decades to finally realize its shale boom, success built on a combination of underlying factors – competitive and open markets, active small players, developed infrastructure and easily available expertise, and none of these actually holds true for China.

A comparison of plays and rocks reveals China’s uniqueness, says Woods, with shale formations tending to be deeper, more tectonically fractured and often less-pressured than US plays, for greater depth Woods states, requires deeper wells, which in turn leads to higher cost and more challenges maintaining well integrity while drilling.

Again, most of China’s shale gas plays, Woods explains are located in mountainous terrain unlike Texas which, the report says, has viable and straightforward well sites and flatter topography. For China, operators have to first remove mountainous land to host well sites, build their own infrastructure, and transport drilling crews and equipment across vast distances to the well sites, exacerbated by high population density that also makes drilling and hydraulic fracturing harder.

The situation was so that shale players and majors were on demand at China’s vast shale resources during the first few years of the decade, but all eventually were stories as all were on the run after lacklustre results, with only BP staying behind with two undeveloped shale production sharing contracts.

But the Chinese NOCs have overcome these challenges by developing their own understanding of the unique geology, relying on their own service arms to get more experience and, most importantly, progress in completion techniques and technology, says Wood Mackenzie.

They have adopted, according to Woods, a pad-based drilling, fracturing and production process, which reduces the footprint of the well sites on the mountains, and this practice, combined with more indigenous technology and drilling and completion techniques – fracturing trucks, drillable bridge plugs, and drilling trajectory control know-how for example – have helped to save drilling time and reduce costs, while wells are becoming larger, Woods said.

And while Chinese shale well costs are still much higher compared to the US, (even 20% higher compared to a deeper and larger well in the Haynesville), a recent turnkey contract for drilling, cementing and completion of four Sichuan wells won by domestic oil services company Honghua Group, could perhaps hint at a new chapter in Chinese shale, the reported pointed out. The contract would imply an all-in cost at US$7-7.5 million per well, a further 20% drop in well cost compared to 2017, once pad construction, infrastructure and facilities costs are included.

“While we do not expect a Chinese shale gas boom anytime soon, the NOCs will no doubt continue to push on and innovate, driven by the need to secure and develop energy resources for strategic reasons,” concluded Dr. Yang.

 

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