Shale-oil activity in China has met with limited success so far and is likely to remain restricted in the short term. Coalbedmethane (CBM) activity is developing relatively consistently, and looks set for continued steady growth.

When it comes to the lure of China's shale-gas reserves, however, the potential is obvious. Reserves are estimated at 1,275 trillion cubic feet (Tcf) by the US Energy Information Administration (EIA), making the country the world's largest potential single source of shale gas.

Not surprisingly, the Beijing government is keen to focus on this sector as it seeks to replicate the shale boom in the US But China faces many challenges before it can achieve similar success, including those relating to topography, finance, technology, geology, water supply, infrastructure and government administration.

China's government did little to help its image when it announced in 2013 that it had awarded the majority of blocks in its second shale-licensing round to domestic bidders, most of which were obscure utility players or government investment bodies with little or no direct experience in the oil and gas industry.

Observers believe that among all the companies holding shale exploration blocks from China's first and second licensing rounds fewer than 150 wells have been drilled, with commercial production negligible. This has cast into doubt the seemingly impossible government target of 229.5 Tcf of shale-gas production by 2015.

Sichuan leads the way

Some headway is being made, however. Shell and state-owned partner China National Petroleum Corp. (CNPC) recently gave Beijing hope of significant future production by starting hydraulic-fracturing operations in Sichuan province in southwest China.

In March 2013, China approved a production-sharing contract with Shell for the Fushun-Yongchuan block. Shell immediately pledged to spend US$1 billion a year on China's shale sector as part of the company's goal to increase global output to 4 million barrels of oil equivalent (MMBOE) per day by 2017-2018, up from current levels of 3.3 MMBOE per day. Peter Voser, Shell chief executive officer, said at the time that the partners had a “significant drilling season” planned for 2013 and 2014. Shell and CNPC began drilling in Sichuan in August 2013.

In addition to Shell, two US operators have teamed up with state players. Chevron has set up a joint venture with CNPC and also is drilling exploration wells in Sichuan, while ConocoPhillips had plans with Sinopec to drill wells in the same province before year-end 2013.

Despite Shell and others pushing ahead with these initial programs, international players have expressed concern that Beijing has not yet established the required regulatory framework to properly develop its shale-gas reserves.

Foreign companies' technology and knowhow is vital to the future of the shale-gas industry in China—and most of this know-how has been developed to help achieve the huge success currently under way in the US

Obstacles to growth

China's most promising shale-gas deposits lie in three large basins: the Tarim Basin in the northwest, the Ordos Basin in north-central China (including Inner Mongolia) and the Sichuan Basin in the southwest.

Exploration and development challenges include not only the complex geology in many Chinese basins but also the depth of the shale horizons. The shale deposits can be anywhere from 8,000 feet to 21,000 feet below the surface, and fracturing is needed to access the gas.

The large number of frac stages and the depths required for development often result in high drilling and completion costs. If the reserves are sufficient, costs alone are not a problem. But fracturing requires significant amounts of water, presenting another potential barrier to development. China already has a shortage of water and, given that many of the country's shale-gas plays lie in mountainous or desert regions (either with little water or poor access to water), the obstacles begin to stack up.

Additionally, the country's gas pipeline infrastructure must be expanded to accommodate the remote topography and the extra capacity required if shale gas is produced in large volumes.

These factors pose serious impediments to any operator contemplating opportunities in China. Those most interested to date are majors like Shell, Chevron and ConocoPhillips that have the capacity to deal with such challenges. But there are other hindrances: the complexities of dealing with government authorities and the current licensing system, which has failed to trigger unconventional exploration activity even on a modest scale.

Licensing lull

Beijing's decision to award shale blocks to domestic utilities and local government investment funds in the second licensing round has backfired, with progress painfully slow to date. In January 2013, 19 exploration blocks were awarded to 16 Chinese companies in an attempt to introduce broader competition into an industry that has been dominated by a handful of large state-owned companies. The 16 winners committed in their bids to spend a total of at least $2 billion over the next three years. But according to a report by China's Ministry of Land and Resources (MLR), after six months most of the 16 companies have, at best, only initiated seismic work, due to insufficient industry knowledge or funding.

“For those who do not put in exploration work or even, in an extreme case, are using the acreage as an excuse for fundraising, we will reduce the size of their blocks or even revoke them,” a spokesman for the MLR said.

As a result of this slow progress, a planned third round for shale-gas blocks was expected to be delayed until the end of 2013 or into 2014.

Shale-oil potential

In terms of shale oil, recent assessments have focused on the lacustrine black shales of eastern China's sedimentary basins. These are economic to develop, since the area has a dense population and is home to most of the country's economic activity.

China has an estimated 300 billion barrels of recoverable shale-oil reserves, and the average production costs could be around $50 per barrel, according to Chengzao Jia of PetroChina's Research Institution of Petroleum Exploration and Development. Tight oil mainly occurs in the lake basin deposit system in the Meso-Cenozoic and has already been economically produced in the Changqing oilfield in the Ordos Basin.

According to Zhijun Jin of the Sinopec Research Institute of Petroleum E&P, state-owned companies have “drilled hundreds of thousands of wells during the past 55 years,” and excellent data exist to help find new reserves. The shales in the region are described as being rich in natural fractures with overpressured locations. Thickness ranges from 99 feet to 328 feet. In total, eight favorable shale-oil exploration plays have been identified in eastern China alone, he said.

CBM success

The more advanced activity within the CBM sector means that China currently has several such projects under way, with the sector growing slowly but steadily.

China's National Energy Administration (NEA) said in 2013 that the government would focus its CBM developmental efforts on the Qinshui and Ordos basins in particular. Production capacity of CBM in the Qinshui and Eastern Ordos basins should reach an estimated 564.8 billion cubic feet per year by 2015, according to the NEA.

The Ordos Basin currently accounts for more than 30% of China's domestic gas production and holds large reserves of petroleum, conventional natural gas and CBM. The NEA is keen to keep developing the basin because of its competitive well costs as well as its large resource potential and high recoverability.

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