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China looks west to solve energy riddle

Xinjiang has potentially huge untapped reserves, but exploration in the desert province presents complex geological and political challenges

Chinese NOCs are forging ahead with challenging ultra-deep drilling and shale projects in Xinjiang Uyghur Autonomous Region, underlining the far western province's potential importance to the country's drive to meet ambitious energy security plans.

PetroChina, one of China's ‘big three' NOCs, completed Luntan 1, Asia's deepest well at 8,882m, in the Tarim basin at the end of July, saying it had taken a year to drill due to complex geology and difficult ultra-high-temperature and ultra-high-pressure conditions. It was the latest completed of 27 ultra-deep wells drilled at the Shunbei field.

Xinjiang momentum is building. Despite the region's severe weather and remote desert conditions, major finds in December last year included the Mahu field in the Junggar basin with an estimated 400mn t of oil in place, and the Zhongqiu-1 well in the Tarim basin, which tested daily flows of 330,000m³ of natural gas and 21.4m³ of condensate.

In May, PetroChina started drilling work on 47 wells at its Jimsar shale oil field in the Junggar basin, which the firm says has 1bn t of reserves. And, in July, PetroChina and fellow 'big three' firm Sinopec signed an exploration agreement to explore and develop oil and gas reserves in the Tabei and Tazhong blocks in the Tarim basin, which are known for their complex geology, as part of plans to carry out joint geological studies on 81 blocks covering 305,800km² in the Tarim and Junggar basins, as well as in the Sichuan province.

"Self-sufficiency is a long journey, and the completion of Luntan 1 is a significant step in oil and gas companies' efforts to increase domestic output," says Li Li, energy research director at consultancy Icis China. "China's reliance on energy imports rose quickly in recent years, and reached 45pc last year," she adds, citing figures from the 2018 BP Statistical Review. 

The shale and ultra-deep drilling projects form part of PetroChina's RMB150bn ($22bn) exploration and downstream chemicals and power expansion strategy for the province over the next two years. The firm is reported as saying this will this boost the region's output to 50mn t oe between 2018 and 2020.

The importance of Xinjiang's gas⁠—China's Ministry of Natural Resources has estimated that the Tarim basin holds 9.7 tn m³ of ultra-deep natural gas resources, or 60pc of the country's potential reserves⁠—is compounded by its strategic location as a gateway to Central Asia and as the starting point of the country's 4,000km 25bn m³/yr West–East Gas Pipeline.

Desert blooms

But the government's five-year plan published in 2016 targeting an increase in domestic gas production to 200bn m³/yr by 2020, to forward its Blue Skies environmental policy, still looks ambitious. Achieving it would require output to increase by an average of 20bn m³/yr in 2019 and 2020, compared to the 11bn m³/yr average for 2017 and 2018.

Gas demand is expected to grow to between 300bn m³/yr and 400bn m³/yr 2020, according to the latest five-year plan, meaning that Xinjiang would contribute only 10pc or less of total demand even if a 30bn m³/yr production target is met. But analysts say that PetroChina's focus is also driven by the political benefits of investment there, given the importance of the undeveloped and historically restive province in Beijing's eyes.

"PetroChina wants to be seen as a company following the national direction, and Xinjiang is a key province for the central government's goals," says Liutong Zhang, director of energy consultancy WaterRock Energy. "It is a resource-rich and relatively unexplored province, but publicity also plays a part. NOCs are under a lot of government pressure to increase domestic upstream investment".

PetroChina's next phase of investment in Xinjiang will likely focus on gas rather than oil reserves, Zhang adds, and include the construction of downstream infrastructure such as petrochemical and power plants that help build up the local economy and capitalise on its potential to export to Central Asia.

The construction of downstream facilities would help spur economic growth in the impoverished province, a potentially important soft power tool for Beijing as it seeks to assimilate the majority Turkic-speaking Uyghur population into mainstream Han Chinese society.

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