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China’s shale hunters look beyond Sinopec's Fuling gasfield

China's state-owned oil companies are starting to ramp up their shale drilling efforts as they look to replicate Sinopec’s success at the Fuling gasfield, but high costs and technological problems continue to hamper investment in the sector

China National Petroleum Corporation (CNPC), the country’s largest gas producer, will accelerate drilling this year and plans to sink more than 100 horizontal shale wells across three exploration areas in Sichuan province, said Wang Haige, a director at CNPC Drilling Research. 

CNPC drilled  23 shale wells in the first nine months of this year. Last year it drilled just 13. “This year we have seen a lot of progress, and we expect more next year. We will frack many more wells in the first half of 2015,” Wang says. 

The increased drilling has raised hopes from some in the industry that CNPC will be able to discover its first major shale development, following progress at the Fuling shale-gas field. However Wang pointed to a number of difficulties that continue to slow progress in developing shale. 

Sichuan’s shale formations lie deep below the region’s jagged mountains, which has makes development far more complex and costly than in the US, where drilling takes place mostly in flat, sparsely populated areas.  

One of CNPC’s wells had to be drilled to a depth of 6,000 metres (19,685 feet) before hitting its shale target, far deeper than those in the US. Wang said CNPC has also struggled with the region’s difficult geology and patchy shale reservoirs. 

Wells have frequently collapsed in on themselves during drilling, making casing and cement jobs problematic and expensive. Well completions have often not gone smoothly, and at some wells the company has been unable to carry out all the fracturing stages initially planned. 

The average drilling cycle for CNPC has been around two months, although it is now speeding up, Wang says. “If the drilling time can be brought down to one month then the economics will improve,” he adds. 

In the US, companies have reduced the number of drilling days in shale fields to as little as two weeks in established shale plays. At Fuling, Sinopec said it has completed some wells in 40 days. 

Long drilling times and technical problems mean that wells remain far too expensive to make shale gas economically attractive for CNPC. “We really need to speed up the pace of innovation. The biggest problem is the price. It (Chinese shale gas) cannot compete on the market,” says Tang Tingchuan, development strategy director at CNPC’s Policy Research Office. The comments point to a contradiction that will make shale development difficult in China over the next few years. Only trial and error experimentation in drilling will deliver lower costs and technical breakthroughs, but until these materialise, the top state-owned companies will be wary of investing in shale. 

Many analysts have assumed that political pressure from the central government would force the state-owned enterprises to invest at high levels - and even at a loss -  until breakthroughs are made. And while bigger companies are allocating more capital to shale exploration, investment is far below where it needs to be. 

CNPC and its listed subsidiary are investing more in China shale this year than in 2013. Last year less than 1% of the company’s  capital spending went towards shale, but that figure is expected to rise to just over 2% for 2014. But investment is not yet big enough to prompt a big significant breakthrough in China’s shale sector. Although spending is widely viewed as insufficient, the company does not lack ambition in what it thinks it can yield from shale reserves.

CNPC thinks it achieve shale gas output of 5 billion cubic metres a year (cm/y)by 2017 and 12bn cm/y at the end of the decade, according to the company’s current targets, up from 2.6bn cm/y forecast for 2015. The company has been more reluctant to spend on shale gas than Sinopec because it has large reserves of cheaper to produce conventional and tight gas. 

Sinopec, which is historically a refiner, does not have a large portfolio of attractive gas projects in China, so it has spent more time and effort on unconventional reserves. 

The government has been reluctant to open the sector to outside players that could bring new cash, technology and innovation, meaning China’s hopes for shale will  rest almost entirely on the shoulders of its two largest state oil companies. 

This is a far different approach to that taken in the early days of the US unconventional sector. The US had dozens of small explorers that were eager to chase shale before it was proven commercially, mainly because they saw it as an opportunity to steal a march on their larger rivals. This fierce competition led to technological breakthroughs and eventually rapid development. 

China’s state-owned enterprises may be able achieve the same ends by different means, but it is clear now how quick this would be. 

The government has so far proposed some ideas to motivate the industry. It is offering subsidies for shale-gas production to help make projects more economically attractive, and is considering setting up shale gas demonstration areas, an echo of the special economic zones that have been so important to China’s economic development over the past 30 years. 

Sinopec’s experience at the Fuling shale field, which covers 108 sq km in the company’s Jiaoshiba Block, shows that some tangible progress is being made. The company has drilled around 100 wells at the field and is on track to hit its 5bn cm/y 2015 production target, says Shi Yuanhui, a technical director at Jianghan Petroleum, a Sinopec subsidiary.  

The company uses foreign technology for some of its operations, such as well logging, but it is increasingly using in-house technology and drilling equipment at Fuling. 

That is helping to build domestic capacity. The company has applied for 12 national patents related to shale drilling, three of which have been approved, Shi says. “We have an impression that essentially the in-house oilfield service teams under Sinopec Group, such as Jianghan Petroleum, are capable of providing drilling and fracking services required for shale gas exploration and development,” Thomas Wong, an analyst at Credit Suisse, said in a note to clients after a visit to Fuling earlier this year.

One area that has proven particularly important, Shi said, is pad drilling, in which multiple wells are drilled from a single platform. Sichuan’s mountainous terrain means there is a lack of  flat land suitable for drilling. but the technology has also helped lower costs. Drilling a single well from a pad can cost more than 100m yuan ($16.3m), says Shi. But drilling two wells brings the per-well cost down to 80m yuan, while drilling five wells can bring the cost down to 60m yuan per well.  For now, though, Fuling remains a one-off and many have questioned whether Sinopec has learned much from the project that could be deployed as useful experience elsewhere. 

Shi dismisses such scepticism, however, saying that as long as the company has the will, it can replicate the success at Fuling. “Sinopec has started a new era in Chinese exploration and production,” he said. “In Sichuan we have more blocks like Jiaoshiba – the key is committing to exploration.”

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