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BP ploughs lonely shale gas furrow in China

China is inviting foreign operators to develop its vast deposits

Given that several major international oil companies gave up on shale gas exploration in China and went elsewhere, there is a lot of interest in what BP is doing there. The company started drilling in the Neijiang-Dazu block in the southwestern province of Sichuan in September and will try its luck in early 2018 in the nearby Rong Chang Bei block.

BP has moved quickly after signing a production-sharing contract last year with China National Petroleum Corporation in what looks likes a bold move following the withdrawal of Hess, Chevron, Shell and ConocoPhillips from China's shale gasfields in pursuit of more profitable plays. So far, the history of independents in China's shale gas has been uniformly negative, with all of them packing up and leaving since the pioneering Newfield conducted a joint study with CNPC in 2007.

Currently, BP is the only foreign operator in China's shale gas reserves.

Earlier this year, Sinopec vice-president Ma Yongsheng cast doubt on the long-term prospects for shale-gas exploration, despite the group extracting 6bn cubic metres from its Fuling field in 2017, more than any other Chinese-owned oil and gas major. "Without government subsidy, our shale gas business is on the verge of being loss-making," he told Reuters.

He put the full cost of producing 1,000 cm of gas at 1,100 yuan ($175) at Fuling, Sinopec's main base of operation. This price begs several questions over the viability of shale gas in China, barring technological breakthroughs that would dramatically cut the cost of production.

So what does BP know that its predecessors don't? After all, ConocoPhillips relinquished the block in 2015.

Multilateral drilling

The Neijiang-Dazu contract with CNPC, BP's first shale gas venture in China, covers an area of about 1,500 square kilometres while the second in the Rong Chang Bei block is spread over 1,000 sq km. BP didn't respond to questions, but its 2016 Energy Outlook clearly sees China as the place to be. According to BP's predictions, China's output of shale gas will increase steadily between now and 2035 to the point where it will be the world's largest producer, pumping 13bn cubic feet (37bn cm) a day. BP also sees the wider Southeast Asia region as an important long-term contributor to shale gas production and may be putting a stake in the ground in China with a wider view.

In the Sichuan Basin, BP is backing its new-found technology of multilateral drilling that it has been developing at its Lower 48 onshore business, one of America's biggest producers of natural gas. Last August, multilateral drilling brought online what the oil major described as a "highly productive" well in the San Juan Basin's Mancos Shale.

25.1 trillion cm—China's shale gas deposits

According to the group, multilateral drilling "is revolutionising the way BP is extracting energy from its reservoirs". Multilateral wells feature many horizontal ones connected to a single vertical drilling hole—or "well bore"—that allows it to access more oil and gas in a single reservoir, but with fewer drilling sites.

BP's vice-president of exploration and sub-surface technology at Lower 48, Harris Cander, says multilaterals boost production and unlock pockets of oil and gas in fields that would in many cases remain untapped. "Multilaterals can deliver premium returns," he explains.

Based on its experience in the past two years, BP is using multilaterals across all its operations. So impressed has the company been with the results in the Lower 48 that its engineers there are collaborating with teams working unconventional reservoirs elsewhere, including in Oman.

Vast reserves

The extent of China's shale gas deposits isn't in doubt. Officially, its vast reserves are put at 25.1 trillion cm—although that figure is rising all the time. Last year, for example, Sinopec hiked its estimate of reserves at Fuling to 600bn cm, up by a startling 58%.

Judged by the size of reserves alone, theoretically the potential is enormous. As Asia-headquartered law firm King & Wood Mallesons noted in a 2015 report: "When you juxtapose the transformative impact shale gas has had on the US oil and gas market with the shale prospects in China, it's difficult to overstate the potential opportunities related to shale in China." In support of its argument, the firm highlighted the contribution that foreign investors can bring in enhanced oil recovery, geophysical prospecting and well drilling and other services.

However, pending the results that BP and CNPC can produce at their two blocks, the viability of the reserves remains uncertain. As the International Energy Agency, echoing Sinopec's vice-president, points out in its 2017 global energy outlook, "there remains significant uncertainties about the quality of China's shale resources and the eventual costs of production".

Comparisons with US shale aren't valid. The most prolific fields in America are tapping shale gas from 1,600 metres down, compared with up to 4,800 metres deep in Sichuan Province. For example, the Wei 206H1 block where BP has started work will be drilled to 4,790 metres.

Also, in general China's deposits present technical difficulties not experienced in US shale plays, such as mountainous terrain and complex geologies. But perhaps the biggest challenge is the high population density that makes land access difficult. For instance, Sichuan has 70m inhabitants with a density of about 538 people every square kilometre, one of the highest concentrations in the world. And other shale gas areas such as the South China Basin, North China Basin and Bohaibei Basin all have densities above 250 people/sq km, as Oxford Institute for Energy Studies (OIES) researcher Fan Gao has pointed out.

Breakthroughs

China's majors regularly report technical breakthroughs in drilling that are improving lifting costs, but without specifying what they are or whether they apply to shale gas. For instance, PetroChina announced it had reduced oil and gas lifting costs by 1.9%, to $11.34 a barrel, over the first nine months of 2017. The group is also applying improved technologies to old exploration regions such as the Junggar Basin and Bohai Bay Basin that have produced "new breakthroughs". PetroChina, too, claimed "great breakthroughs" in natural gas exploration in the Tarim Basin in northwest China.

Judged by the size of shale gas reserves alone, theoretically the potential is enormous

China's majors—the Three Barrels—are chasing government targets that are variously described as ambitious or impossible. Having backpedalled from unrealistic earlier goals, Beijing has set a 2020 target for shale gas of 30bn cm a year by 2020 and 80-100bn cm/y by 2030. At current production rates these just might be achievable. According to the Ministry of Land and Resources, shale gas production hit 7.9bn cm in 2016, up by 76.3% year-on-year from a low base. The 2017 figures aren't out yet, but they should provide a clearer picture.

The IEA has faith in China's chase for unconventional gas, at least in the long term. "The outlook for gas production is more upbeat than for oil," the agency reports, noting that the projected increase from the current 140m barrels a day to 340m b/d in 2040 is "due almost entirely to an expected expansion in unconventional production, largely from shale".

Individually, Sinopec and PetroChina, the main shale gas operators, are certainly raising their game. In early January, the former announced it had produced 6bn cm from its Fuling project, its richest source of shale gas, in 2017 for a year-on-year growth of 20%.

In its fixation with production targets, Beijing also has high hopes for coal-bed methane (CBM), announcing in late 2017 that production had hit 17.9bn cm, up by 96% compared with 2010. However, China has been trying to exploit its CBM reserves, assessed as the third-largest in the world, for nearly 30 years, without much success, and the economics of CBM are largely unknown.

Pressure

Will Beijing start dispensing subsidies for shale gas operations to meet its production targets? There's no indication so far that it will do so, but that would certainly turn the economics of China's reserves on its head.

Meanwhile, there is a lot of pressure on BP. If the group can land gas at viable costs, it would likely trigger a rush by foreign operators that would, in fact, be welcomed by Beijing. As King & Wood Mallesons says, the government has rewritten the fine print in its regulations for foreign direct investment that encourages non-Chinese operators in unconventional oil and gas projects.

However, this would very much be on China's terms. As the OIES has pointed out, given that the Three Barrels control roughly 70% of total shale gas resources in their existing acreages, which often overlap with conventional oil and gas-bearing basins, foreign operators have no choice other than to work with the nationally-owned giants.

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