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China’s domestic gas steps up

Shale gas helps keep—albeit revised—targets well in sight

China is firmly on track to meet its recently announced domestic gas production goal for this year, with output to date having maintained the strong growth momentum seen in 2018-19.

China’s big three state-owned oil and gas groups have stepped up development of the fuel, including from shale gas projects in southwest China, since Chinese president Xi Jinping ordered them two years ago to intensify exploration activities to strengthen national ­energy ­security.

And with the geopolitical outlook looking bleak—China’s relations are being strained by its Hong Kong crackdown while the Sino-US relationship is likely to deteriorate further during US president Donald Trump’s embattled re-election campaign—PetroChina, Sinopec and Cnooc will likely be encouraged to double down on domestic production to enhance supply security as much as possible. More domestic output means less room in China’s gas supply mix for imports, and pipeline gas is at greater risk than relatively cheap LNG cargoes.

Chinese gas output in May grew by 12.7pc year-on-year, to 15.9bn m³, maintaining momentum from April’s 14.3pc increase, which was the highest growth rate since October 2017. Production from January to May reached 78.8bn m³ and was up by 10.1pc from the same five-month period in 2019, putting 2020 to date ahead of last year’s overall growth of 9.8pc.

181bn m³ – Gas target for 2020

The encouraging figures put China, the largest gas producer in the Asia-Pacific region, on track to achieve a goal of producing c.181bn m³ in 2020, which was included in recent guidelines for promoting energy development this year from the National Energy Administration. China produced 173.6bn m³ of gas in 2019, so the new target represents a 4.3pc increase.

China’s monthly gas output has averaged 15.8bn m³ so far this year, which would imply an annualised rate of about 189bn m³, or year-on-year growth of 9.4pc, actually beating the end-of-year goal. But it should be noted the new figure represents a downgrade from an output target of 200bn m³ by 2020 set by the State Council, China’s cabinet, nearly two years ago.

China’s NOCs have delivered this year’s production increase despite the sharp fall in oil prices that saw Brent touch a 21-year low of $16/bl in April. There were concerns earlier in the year that associated gas output from ageing oilfields such as Xinjiang, Dagang, Liaohe and Zhonguan would suffer in the wake of capex cuts announced by China’s big three companies, but Brent’s rebound to above $40/bl and strong Chinese oil demand have helped ease these fears.

Shale driver

And domestic gas output growth looks broadly resilient. Ongoing gas supply security concerns mean output from oilfields with a high proportion of associated gas will be prioritised by China’s majors.

Domestic gas production growth is being driven largely by unconventional gas output, which was already starting to surpass expectations by the end of last year. China produced around 15.45bn m³ of shale gas in 2019, up from 10.8bn m³ in 2018 and 9bn m³ in 2017.

Consultancy Wood Mackenzie had not expected China’s shale gas output to reach an annualised rate of 15bn m³ until 2020. On the other hand, the IEA said last year that data from CNPC/PetroChina and Sinopec indicated their combined output would hit 19bn m³ by 2020, although it also under-forecast 2019 at just shy of 15bn m³.

Of last year’s total shale volumes, just over 8bn m³ came from China’s largest gas producer PetroChina, which was an 88pc increase from 2018. PetroChina said in January that it is targeting shale gas output of 11bn m³ this year. Sinopec meanwhile produced 7.35bn m³, with 6.33bn m³ contributed by the Fuling shale gas field in Chongqing municipality.

Virtually all of China’s extracted shale gas last year came from the Sichuan Basin in southwest China, which holds around 80pc of China’s technically recoverable shale gas resources. Output has been rising as Sinopec and CNPC’s own oilfield service companies gain more experience drilling and extracting gas from the complex geology of the mountainous ­region. 

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