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Gas shortages force Chinese long term shale action

Residential gas demand could rise up to tenfold in some cities this winter, but results from shale aren't expected until 2020

The pace of unconventional gas development, particularly shale and coal-bed methane, will play a critical role in meeting China's ballooning gas demand, but not before 2020. However this will provide renewed opportunities for foreign companies, says Wood Mackenzie.

Northern China will see residential gas demand rise up to tenfold from non-peak requirements in some cities this winter. To meet this, China will be forced to rely on spot imports due to limitations on domestic production and contracted supply.

More significantly, this is indicative of likely winter gas shortages through the rest of the decade. For this reason, the struggle to keep northern China warm through winter calls for urgent action. "We are seeing rising gas imports, as well as increasing domestic prices, yet shale offers a potential solution," Gavin Thompson, a Beijing-based gas specialist at Wood Mackenzie told Petroleum Economist.

"Efforts to promote shale are now being taken. But it will be an evolutionary process rather than revolutionary," adds Thompson.

There has been some progress in the shale-gas industry, including some positive wells results. Gas price reforms announced this year, if fully enacted, should sufficiently incentivise investment in unconventional gas too. But China must tackle other critical issues to encourage the pace of development.

The energy research company highlights three pertinent shale-development challenges.

Firstly, there needs to be greater access to acreage for companies willing to commit risk capital in exploration and development -China's shale is different to that of the US, but foreign companies, many of which have expertise in difficult shale plays, can overcome the issues.

Secondly, China's pace of technical innovation can be hastened through cooperation with service companies able to provide skills such as seismic testing, as well as drilling and fracturing technologies.

Finally, more widespread access to technical data of previous and ongoing drilling is required to encourage higher levels of activity, by allowing operators to apply lessons learnt to new plays. "Certainly there are some voices within the government that want to see more competition, companies bringing technology and capital to the sector, but the challenge around data is going to be there," says Thompson.

The government should perhaps consider introducing more radical measures that will kick-start the sector, but that enthusiasm is just not coming through yet, he adds.

While Thompson believes that significant production won't be seen this decade, because the level of drilling is low, he expects shale-gas production to ramp up to 140 billion cubic metres (cm) by 2030 - that is assuming the government takes action.

By 2020, the research firm projects shale-gas production of 15bn cm, far short of the government's 60bn to 100bn cm target. 

But China will not want to develop a reliance on spot suppliers, which makes developing domestic shale gas remains vital in the longer-term.

As in the US experience, China will simply need more time for successful shale development and progress the more immediate challenges. These challenges will afford renewed opportunities for foreign companies to position themselves as part of China's shale-gas history, says Wood Mackenzie.

Aside from the Sichuan basin, Thompson expects plays to the south in the Guizhou/Guangxi shales, as well as in western China's Tarim basin, to offer the next opportunities, as they are the country's only marine shales. Everything else is generally lacustrine shale. These take longer to develop, as they tend to be more clay heavy, which is harder to fracture.

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