Asian promise, but full of risk
There is huge potential for investors, but it remains hard to say if and where the shale plays will work
Promising shale-gas plays are scattered across the energy-hungry Asia region. But exploration has scarcely begun. So far, there has been no significant shale-gas drilling outside China and there are no plays holding more than 100 wells -considered the minimum requirement to prove up a basin.
Nevertheless, developers remain excited about the opportunities in both China and Indonesia, where, on a technical basis, the shales signal a high likelihood of being commercial. Both countries are gas-short and domestic gas prices are steadily rising, offering opportunities for investors.
In China, most of the activity centres on the Sichuan basin, but the play has seen mostly poor production results coupled with very high drilling and hydraulic fracturing costs.
Sinopec's recent Fuling discovery in the Sichuan looks promising but is probably a combo well - flowing from both conventional and unconventional rocks - and it's located in a small anticlinal fault block, which remains unique and rare, says Scott Stevens, senior vice president at US consultancy Advanced Resources International (ARI).
"I prefer the Junggar basin in northwest China where Hess has a production-sharing contract (PSC), but (there has been) little drilling thus far. It looks structurally simpler and more like the Eagle Ford," he told Petroleum Economist, referring to Texas's prolific shale play. However, investing in Chinese shale gas is not easy. Investors can only access the sector partnering in blocks awarded to Chinese companies in the country's first and second shale-gas auctions.
It's best for investors to explore opportunities with the national oil companies, but to do so requires a lot of money and plenty of technical expertise. It is not surprising then that it's largely the international oil companies probing around, initially through joint studies, followed by multi-phase pilot programmes. Investors can consider teaming up with China's private companies that won acreage in the second round, but most have almost no oil and gas development experience and "investors would be pretty mad to do so", says Tony Regan, a gas specialist at Singapore-based consultancy Tri-Zen.
China's shale regulatory framework is a work in progress with some grey areas surrounding joint study arrangements. For the savvy investor, though, this could present an opportunity. The government's policy and regulatory development are an iterative process, offering companies the chance to shape future regulations through dialogue with government and massive state-owned enterprises. Australian-listed unconventional explorer Dart Energy has used its experience in China to access shale gas acreage in the Sichuan basin and is probably the only small foreign independent to do so.
Indonesia also has significant shale gas potential. The nation has received more than 70 proposals for shale gas projects, the bulk of which focus on the provinces of Sumatra, East Kalimantan, Central Kalimantan and West Papua. Only a fraction of these have led to joint studies. But Jakarta has already awarded two blocks - one to national oil company Pertamina and the other to a joint venture led by Asia-focused private junior Pacific Oil & Gas. The government is offering eight more shale gas working areas - five through direct offers and three in a regular tender.
Several explorers, including Australia's AWE and Nu Energy, as well as the Pacific-led venture, which includes Canada's Bukit Energy and New Zealand Oil & Gas, have reported early-stage evaluations of shale gas potential in Sumatra. Basins in Sumatra lie close to markets in Java, the archipelago's most populous island, while basins in Kalimantan lie near to the 22.5 million tonne per year Bontang liquefied natural gas export terminal, which is operating well below its nameplate capacity.
While the exact terms of the two shale-gas production-sharing contracts awarded are not known, unconventional proponent Lion Energy, which is progressing study agreements for four prospective shale blocks, expects the fiscal terms to be significantly more attractive than conventional terms. Industry players expect the terms for shale gas to be similar or more than for coal-bed methane. For that - the company take is set at 45%.
In South Asia, India is opening up its shale-gas sector in stages. For now only two national oil companies - Oil & Natural Gas Corporation (ONGC) and Oil India - are allowed to explore for and produce shale gas in blocks they already control. ONGC and US major ConocoPhillips are busy studying the rocks' potential.
At a later unspecified date, the government will allow other state-run, as well as private companies, into the shale gas industry.
In neighbouring Pakistan there has been no exploration and few studies to date. But the government is expected to release a new shale gas policy at the end of this year. Authorities are expected to offer wellhead gas prices of between $11-12 per million British thermal units to entice developers to the energy-hungry nation.
Some conventional explorers, such as Italy's Eni, Pakistan Petroleum, and Karachi listed Oil & Gas Development Company Limited, have carried out some early experimental work in their conventional blocks.
Foreign companies in China's shale sector
Joint study agreement with China National Petroleum Corporation (CNPC) at the Neijiang-Dazu Block.
Joint study agreement with Sinopec for Qijiang in southwestern Sichuan province. The US major will carry out a 2-D seismic survey and drill two wells.
Joint study agreement with Sinopec at Xiang E Xi Block. One exploration well, Liye-1, already drilled. The second well, Engye-1, was expected to be completed earlier this year.
The Anglo-Dutch supermajor last year started a 'significant drilling season' at the Fushun Block, as well as its tight-gas Block in Jinqiu, both in Sichuan province, to find sweet spots for longer-term production scheme.
Shell and CNPC were granted China's first foreign-invested production sharing contract (PSC) for shale gas in 2013 at the Fushun-Yongchuan Block.
In October 2012, the joint venture reported flow rates of up to 15 million cubic feet a day at the Yang 201-H2 well, which targeted the Longmaxi shale in Luzhou, Sichuan. The well is the highest flowing single shale well in China.
Joint study agreement with CNPC at the 2,000 square km Rongchang Block in Sichuan province. The block lies next to the Shell-operated Fushun Block.
Joint study agreement with Sinopec for a block in Anhui province. Expected to drill three wells.
Joint study agreement with Sinopec for the Wuzhishan-Meigu Block covering 3,643 square kms in southwestern Sichuan province.
Joint study agreement at the Qiannan basin in southwestern Guizhou province. The US major has not identified its partner, but state media say it is Sinopec. It was reportedly drilling the second and third wells in the basin last year.
The US independent signed a study agreement with Sinopec to assess shale gas and oil potential in the Shengli oilfield in east China.
Reported that BP and Sinopec held talks over potential cooperation at the 2,000 square km shale gas block in Kaili in Huizhou province and a 1,000 square km block in Huangqia, northern Jiangsu province.
Dart Energy signed a production sharing contract with Henan CBM to develop shale gas in the Xiushan Block in Sichuan province. The contract covers 720 square kms, which was awarded as part of the first shale gas auction. Dart hopes to start drilling this year.