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Chinese shale struggles to get moving

The Asian giant is having difficulties emulating the US shale gas revolution, but is determined to keep developing its own resources

Uncertainty over the future of shale gas in China is not just a concern for a gas-hungry country ever more dependent on imports. It also impacts the world's LNG producers, with China now their main growth market. The government's 2020 output target may look unachievable, and the challenges are immense — but one should not underestimate Beijing's determination to make a success of shale gas.

In 2012, the government set a target of 60-100bn m³/yr of shale gas production by 2020. In 2014, that target was reduced to 30bn m³/yr . It now looks as though shale gas output in 2020 will be less than 20bn m³/yr. These disappointing numbers have led some commentators to question whether shale gas will ever make a meaningful contribution to China's natural gas supply mix.

There are, indeed, plenty of obstacles. While China is reckoned by some to have the world's largest resources of shale gas, its geology is unhelpful and there are plenty of above-ground factors getting in the way-mountainous terrain and population density, to name just two.

That said, China has pressing reasons for wanting to develop its unconventional gas riches. They include rampant gas demand growth, a desire to avoid a repetition of severe gas shortages during the winter of 2017-18, and concerns over growing import dependence. These concerns are not helped by the ongoing trade dispute with the US-which, thanks to its own shale gas revolution, is on its way to becoming one of the world's largest LNG producers and potentially a big supplier of gas to China.

Progress to date has been disappointing partly because expectations, and therefore government targets, were set unrealistically high. The US shale gas boom began to become apparent in 2008-09 but development of the technology that made it possible had taken several decades. The first exploration well in China was not drilled until 2009.

There is an interesting parallel with the Vaca Muerta development in Argentina, the only other country outside North America to have commercialised shale gas in any quantity. Spain's Repsol drilled its first well there in 2010, but only now is production starting to take off.

Table 1 shows how unconventional gas output in China developed between 2015 and 2017. The volumes may not be impressive, but the growth rates are — although early indications are that 2018 saw much slower growth, with shale gas output increasing to about 10.3bn m³, a 14pc rise on 2017's 9.0bn m³. That said, in most other contexts, 14pc would be regarded as strong growth.

The big question now is how shale gas output will evolve over the coming years. There is intense interest both within and outside China in its prospects for shale gas development because of the implications for import dependency and the consequences for the global LNG market — but it is not an easy call.

The government acknowledges that production in 2020 will be well below the target of 30bn m³. But even the forecast of 20bn m3 looks optimistic. A projection published by consultant Wood Mackenzie in April 2018 suggested that 17bn m³ was more realistic, and even that is starting to look optimistic, given how few projects there are in the development pipeline and the challenges facing those that are.

Seeking blue sky

Meanwhile, natural gas consumption growth in China is unprecedented. Between 2015 and 2018 it rose from 195bn m³/yr to a provisional figure of 270bn m³/yr. That difference of 75bn m³/yr would on its own constitute the world's tenth-largest gas market.

Growth has been driven by policies put in place under president Xi Jinping to bring back bluer skies to heavily polluted cities and to meet climate-change action pledges under the Paris Agreement. Central to these policies has been a determined switch from coal to gas, in heating and in electricity.

20bn cm — China's likely 2020 shale gas output

Despite the winter 2017-18 gas shortages, these policies have proved to be popular. "The blue sky is something the whole nation wants," says Yanyan Zhu, general manager of the trading department at Cnooc, one of the country's big three producers. "So, in my opinion, the coal-to-gas policy will continue in the long run, which means gas consumption will grow."

China is already the world's sixth-largest gas producer, with output of 147bn m³ in 2017. Some 95pc of that was produced by the country's big three: China National Petroleum Corporation (CNPC)/PetroChina, Sinopec and Cnooc.

However, producers have been unable to keep up with consumption growth, so gas imports have soared. Last year China imported 54.0mn t of LNG, almost three times more than 2015's 19.7mn t. Imports of pipeline gas were 36.6mn t (49.8bn m³), a threefold increase on 2015's 12.5mn t (17.0bn m³).

An inevitable consequence is rising import dependence. In 2015, China imported 32pc of its gas, says Li Yalan, chairwoman of distributor Beijing Gas Group. By 2017 that had grown to 39pc and on current trends import dependence is set to rise to 50pc by 2030.

Under pressure

China's gas producers have therefore been coming under intensifying pressure from the government to raise their output of both conventional gas and unconventional resources such as shale gas, coalbed methane and even coal-to-gas conversion plants.

However, the International Energy Agency (IEA) sees little prospect of large increases in conventional production. In a special report on China in the IEA's 2017 World Energy Outlook, the New Policies Scenario projects a rise from 98bn m³ in 2016 to a peak of 127bn m³ by 2030, followed by a decline to 110bn m3 by 2040. It adds that "expectations are much higher for unconventional gas".

These expectations are largely driven by estimates of technically recoverable shale resources, with some putting China in top place, ahead even of the US.

Table 2, from a research paper published by scientists at the PetroChina research institute of petroleum exploration and development, shows several such estimates, including two made by the US Energy Information Administration (EIA), one in 2011 and another in 2013, that are much more bullish than the others.

The spreads highlight the degree of uncertainty surrounding such estimates. Lead author Dazhong Dong comments that "the potential of transition-phase shale gas resources is not clear" while "the resources potential of terrestrial shale gas is generally limited". Not surprisingly, his own institute's assessment is at the lower end of the range. To put it in context, 12.9tn m³ is about half of the proved reserves in Qatar's North Field.

High hopes

China began its development of shale gas in earnest in 2010 with the drilling of the well Wei 201 in the Sichuan basin in the south-west, inspired by the manifold economic benefits that shale gas in North America was bringing to the US. According to some reports, the bullish global shale gas resource assessment published by the EIA in 2011 was instrumental in the ambitious targets that the Chinese government set in 2012.

"China has two large sedimentary basins that contain thick, organic-rich shales with excellent potential for shale gas development," the EIA report said. "These two basins, the Sichuan and the Tarim, contain marine-deposited shales with potentially favourable reservoir quality, including prospective thickness, depth, total organic content (TOC), thermal maturity, and brittle mineralogical composition."

China's geology is much more complex than that in the US

But China is not the US. Over a decade after the start of the US shale gas ramp-up, replicating that success elsewhere has proved surprisingly difficult. Conditions in the US ticked a long list of boxes when it comes to the prerequisites for shale gas development. Conditions in most other regions are not nearly as conducive.

"With shale exploration drilling just now being initiated, public information on shale formations in China is quite limited," the EIA report warned. "Reservoir quality remains uncertain, while in-country shale drilling and completion services are still nascent. The future of shale gas development in China is promising, but it seems likely that five to ten years will be needed before production will be at material levels."

Complexities abound

Below-ground challenges include the geological complexity of gas-bearing structures and resource depth. According to Dazhong's research paper, much of China's shale gas resource lies at depths greater than 3,500m and "the current technology and equipment of exploration is not adapted to the targeting of shale gas at deep horizons". Even the technologies and techniques developed in the US would struggle at such depths.

Moreover, China's geology is much more complex than that in the US. "The geology has experienced multi-stage deformation," says Yanpeng Sun, a Chinese geologist now based in the US. "That makes it much more challenging in terms of the continuity of the layer. Ideally you want to find a horizontal layer that you can drill into continuously and then fracture. In China it is hard to find those continuous layers."

Economic recoverability is also influenced by a long list of above-ground factors. These include the ownership of subsurface rights, the availability of water for use in hydraulic fracturing and its safe disposal without any risk to drinking water supplies, surface conditions such as topography and population density, and the availability of pipelines for gathering and transportation. The flat empty plains of Texas readily lend themselves to shale gas development; the mountainous terrain in many parts of China, much less so.

China's most successful shale gas development to date is Sinopec's Fuling gas field in the province of Sichuan. In April 2018, the company celebrated the milestone of achieving production capacity of 10bn m³/yr, although actual production in 2018 as a whole was 6.02bn m³ — about the same as in 2017, when it accounted for two-thirds of China's total shale gas production of 9.0bn m³.

The singular success of Fuling highlights how China has struggled to meet its shale gas ambitions. Despite almost a decade of development, the only other projects of any size are two led by PetroChina: the Changning-Weiyuan and Zhaotong developments, also located in the mountainous terrain of Sichuan. Together these two projects produced around 3bn m³ in 2017, rising to 4.3bn m³ in 2018.

Temporary setback

The latest challenge to China's shale gas ambitious emerged last month with reports that officials in Sichuan had suspended fracking activities following mass protests over earthquakes.

According to local reports, protestors blamed fracking for three earthquakes over two days believed to have led to two deaths, damage to thousands of homes and the displacement of hundreds of people. The most powerful quake registered a magnitude of 4.9. Videos on social media showed a large angry crowd attempting to force its way into a government compound, with police holding the protesters back. But their authenticity was not confirmed.

Given the government's determination to make a success of shale gas development, the setback is likely to be temporary. The Big Three oil and gas companies are now throwing considerable resources and talent at the constraints, and smaller independent companies are also starting to get involved.

China may not have the multitude of small, entrepreneurial and innovative companies that contributed so much to the US shale gas revolution, but it is not short of engineers and scientists. PetroChina alone has almost 40,000 research and development personnel.

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