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PetroChina shale caution tempers Beijing's ambitions

The state-run company is reluctant to stray from conventional and tight gas projects

China's efforts to tap into its potentially huge shale gas reserves are being hampered by state-run PetroChina's reluctance to prioritise shale development in favour of what it believes are brighter prospects in its conventional and tight gas projects. China has perhaps the largest shale gas resources in the world, with the US Energy Information Administration estimating China's shale gas resources at 31 trillion cubic metres (cm), more than 25 times its conventional reserves. And policymakers have encouraged the country's major state-run players to develop those resources to boost energy security and help ease the country's reliance on coal, which has led to severe air pollution in the country's major economic centres.

In China's tightly restricted upstream, exploration and development of the vast shale resources rests largely with China's top two national oil companies PetroChina, by far China's largest oil and gas producer, and Sinopec. To date, though, PetroChina has been a reluctant champion of China's nascent shale sector while Sinopec has eagerly pushed ahead. "PetroChina dominates the acreage position, but at the moment they are not placing a massive priority on shale. Their focus is very much on conventional and tight gas domestically," Craig McMahon, head of Asia upstream research at Wood Mackenzie, tells Petroleum Economist. "We reckon they spent about 1% of their 2013 budget on shale."

PetroChina has pushed forward exploration on some of its domestic shale acreage, especially in the Sichuan basin. In 2012, PetroChina signed China's first shale-focused production sharing contract with Shell to explore and develop the Fushun-Yongchuan Block in Sichuan, though future development of the block remains uncertain two years after the deal was signed.

Earlier this month, PetroChina's parent company China National Petroleum Corporation (CNPC) said that it had started drilling its first shale-gas well at the Changning Block in Sichuan where it is working alongside three small domestic energy and investment companies. The first well is expected to take 70 days to complete. CNPC said it plans to drill a total of 50 shale wells at the block. 

Yet on the whole, PetroChina, which accounts for about 80% of China's total natural gas production, has taken a very cautious approach to its shale projects in China. The company has been put off by the high cost of drilling in the country, where wells typically cost at least three times as much as in the US, a lack of technical knowledge of China's complex shale measures, an unsupportive fiscal regime and the difficulties of drilling in Sichuan's mountainous terrain.

PetroChina drilled fewer shale wells in 2013 than in 2012 and has only drilled around 100 wells in total in the last five years, according to Wood Mackenzie data. China would have to drill thousands of wells a year to come anywhere near replicating the US shale experience. Moreover, says McMahan, PetroChina's focus on conventional and tight gas projects has led to a number of recent successes that has vindicated the company's strategy, giving it little reason to change course. Production has been on the rise, thanks largely to PetroChina's ability to bring new tight gas projects into production. Natural gas output for the first half of 2013 was 1.4 trillion cubic feet, up 8% from the previous year, and production is expected to rise by around 10% a year for the foreseeable future as the company increases its natural gas drilling.

The company has also seen significant successes in conventional natural gas exploration. In February, it announced the Anyue discovery in Sichuan, which it touted as one of China's largest-ever natural gas discoveries. The field holds total resources of around 440 billion cm, of which 187.5 billion cm are considered economically recoverable under US Securities Exchange Commission rules. The discovery on its own should boost China's proven natural gas reserves by about 10%.

In contrast to PetroChina's cautious approach to Chinese shale, its smaller rival Sinopec has been more enthusiastic. "Sinopec is certainly leading the way," says McMahon. Shale has been a higher priority for Sinopec, which was historically a downstream-focused company, largely because it does not have the wide range of upstream domestic opportunities that PetroChina has. The company is expected to account for around 100 of the approximately 160 shale-gas wells to be completed in China this year, according to Wood Mackenzie.

Sinopec's first breakthrough in the shale sector has come at the Fuling play in Chongqing, which is China's first commercial shale-gas project. The company said in March that the field holds reserves of 2.1 trillion cm. It expects production to reach 5bn cm by 2015 and 10bn cm by 2017, a much faster ramp up than previously expected.

If the company is able to meet that timeline, it could help China get close to its 2015 shale-production target of 6.5bn cm, previously thought to be far out of reach. Sinopec says the project has also given it the opportunity to develop domestic shale drilling and hydraulic fracturing technologies and equipment that could be deployed elsewhere."The discovery and construction of Fuling shale-gas field, China's first-ever large-scale shale gas field, symbolises a significant strategic breakthrough in shale gas development in China," said Fu Chengyu, the head of Sinopec, in March.

Analysts, though, have been more cautious on the Fuling development, arguing that meeting the timeline will be difficult for Sinopec and that the Fuling shale play is relatively small. "It's a breakthrough, but probably not a watershed," says McMahon.

Large-scale development of China's shale resources will require more action from the government and the industry, especially PetroChina. The government has pushed through higher gas prices that have helped make shale gas more attractive, but further price increases seen as necessary to the shale sector have been slow to come.

For McMahon, the question for PetroChina's shale strategy is if it is not going to take advantage of its shale opportunities, why not open the acreage to more participation from international oil companies with more technical prowess and a greater appetite. "If this resource is a lower priority for you and these guys want to do it, let them," he says.

PetroChina said recently that it is opening up a number of its businesses, including unconventional gas exploration and development, to private investors as part of broader market reforms in China. That, combined with further economic incentives, could potentially open the door to more foreign investment in Chinese shale, though there has been no concrete progress yet.

The scale of China's shale resources, the potential size of the domestic market and the need to cut its coal reliance make China one of the most exciting shale plays outside of the US. But the country has not yet been able to put the pieces together in a way that will see the industry thrive. "The game changer for us is when shale becomes a priority for PetroChina," says McMahon.

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