The country’s gas hunt began in earnest after Beijing’s leaders decided to find alternatives to coal-burning, which for years has caused visibly obvious pollution and health hazards for its smog-smothered citizens. Once the world’s athletic community (and its media) was known to be coming for the 2008 Games, there was of course a pre-games cleanup that was successful – but short-lived.

In 2013 Beijing had the highest number of smoggy days recorded since the early 1960s, and to its credit China’s central government decided enough was enough and that it needed to clean up its act.

China’s energy goals

The latest evidence of this can be seen in the release in January of the 2014 Guidance for Energy Administration (No. 38), an annual document that sets goals across the country’s entire energy sector, by the country’s National Energy Administration. This year’s guidance highlights, among many other things, a very ambitious target of 1.5 Bcm (53 Bcf) annually of shale gas production by the end of the year – seven times more than last year’s estimated 200 MMcm (7 Bcf). China produced 121 Bcm (4.3 Tcf) in total of natural gas in 2013, up nearly 10% on 2012, but has a current demand of 169 Bcm (6 Tcf) and rising.

Shale is not the sole source of China’s gas production, of course. The country already has several established partnerships between its domestic energy major PetroChina and foreign supermajors such as Shell for areas such as northern China’s Shaanxi province, where the two companies are producing 3.3 Bcm (117 Bcf) of gas per year from the Changbei field. This field currently supplies approximately 40% of Beijing’s gas, and the companies are in the process of drilling many more wells to increase production.

PetroChina also just recently announced further conventional gas success, hitting reserves of up to 308.2 Bcm (10.9 Tcf) of technically recoverable gas in the country’s Sichuan basin in the southwest. One of China’s largest gas discoveries in more than a decade, the Moxi block of the An’yue field is certified to hold 440.4 Bcm (15.6 Tcf) of proven reserves.

The operator has already confirmed it will build a production facility to pump 4 Bcm/year (141 Bcf/year) in a first phase of development, to be followed by a second 6 Bcm/year (212 Bcf/year) phase. According to PetroChina, one well flowed 1.1 MMcm/d (38.8 MMcf/d) during trial production and 600 Mcm/d (21 MMcf/d) in development stages.

Joint ventures

Shell and PetroChina are working together in Sichuan Province on a shale gas project there, having signed a production-sharing contract for the 3,500-sq-km (1,351-sq-mile) Fushun-Yongchuan block.

In addition to Shell, PetroChina linked up via one Sino-foreign joint venture (JV) with Total. This venture began producing in the South Sulige area in northern Inner Mongolia in 2012, while PetroChina also invited both Shell and Total to assist it in the development of tight gas reserves in northern China’s Ordos basin. That is where China’s largest gas find, Sulige, was announced in 2001. Also operated by PetroChina, Sulige holds proven geological reserves of 533.7 Bcm (18.8 Tcf) of natural gas. The company also has a JV in place with Chevron.

One of China’s other main state players, China Petroleum & Chemical Corp. (Sinopec), has also signed partnerships or alliances with several international majors to explore for shale gas. It is cooperating with ConocoPhillips to develop shale gas extraction technologies in the Qijiang district in Sichuan province. Total and Sinopec also signed an agreement to cooperate on the exploration for and extraction of shale gas in Anhui province.

Before this, Sinopec had collaborated with BP on shale gas extraction in Guizhou and Jiangsu provinces. Chevron also signed a JV agreement with Sinopec for shale gas exploration in the Qiannan basin in southwestern Guizhou province. ExxonMobil provided assistance to Sinopec for shale gas geological research in southern Sichuan.

Through partnerships like these, China’s government is increasingly pinning its hopes on better exploiting the country’s unconventional reserves, including shale, coalbed methane, and tight gas. The mainland is believed to hold the largest shale resources in the world, potentially up to 36.8 Tcm (1,300 Tcf), according to the US Energy Information Administration.

Water and terrain challenges

However, it is well known that China’s shale gas is nowhere near as easy to exploit as in the US. Water resources are scarce in the part of mainland China where large reserves of shale gas are believed to be located, especially in the north and northwest regions, where the terrain is often extremely challenging, mountainous, and remote, with little or no infrastructure in place.

Paradoxically, there also are other areas where shale gas is located that lie in heavily populated parts of the country, leading to logistical difficulties with regards to moving the large amounts of equipment required in these densely peopled locations.

China’s complex geology means that its shale layers (similar to those in Europe) are often heavily faulted, adding to the drilling challenge and overall costs. Their depth also is an issue, with the shale deposits anywhere from 2,438 m to 6,400 m (8,000 ft to 21,000 ft) below the surface.

Third shale licensing round

Undeterred by this, the country’s Ministry of Land and Resources is expected to launch a third round of auctions for shale gas blocks before mid-2014, with up to 15 blocks to be put up for bid.

The round was originally planned for late last year but was delayed due to slow progress with blocks awarded in the first two rounds amid a growing realization by some of the participants that the exploration process would be more difficult and expensive than first believed.

The ministry also stalled the timetable because it wanted to carry out more geological analysis of the blocks to ensure better quality data for potential bidders.
However, interest is likely to be significantly higher in the next round, particularly with recent announcements such as Sinopec’s confirmation that it had drilled a shale gas well to a total depth of 4,417 m (14,492 ft) that flowed at a maximum rate of 105 Mcm/d (3.7 MMcf/d) in the southwest province of Guizhou. According to the official Xinhua news agency, the well is the deepest drilled so far in the country.

The Dingye-2HF project is situated in Xishui county of Guizhou province and is expected to have an average output of 43 Mcm/d (1.5 MMcf/d), according to the Ministry of Land and Resources. Another shale gas block located in Fuling District of southwest China’s Chongqing Municipality yielded an output of 150 Mcm/d (5.3 MMcf/d) in 2010.

Such success has even tempted offshore-focused state player China National Offshore Oil Corp. to engage in a shale gas project in Anhui province. A total of four exploration wells have been drilled in an initial phase, with a further two to be drilled in a second.

Shale equipment opportunity

Much of the opportunity for foreign technology suppliers will lie in sectors such as shale gas analysis testing, horizontal well completion, horizontal well staged fracturing, revamping for capacity increasing, microseismic monitoring, geological surveying, well logging equipment and tools, and environmental impact control, according to export specialist XportReporter.

The forecast estimates related to shale’s eventual market are huge – although they should at this stage still be treated with caution. For example, according to projections by China Galaxy Securities, to meet the central government’s shale gas production targets of 60 Bcm (2.1 Tcf) by 2020, there will need to be 40,000 wells drilled, with a market size of US $328 billion for shale gas-related equipment at an annualized rate of $3.65 billion.

These are large numbers indeed. But few doubt that it is a major growth market that will head only in an upward direction, backed by a pro-gas government with a clear recognition that outside expertise is a vital tool required for its success.

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