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China cuts 2020 shale gas output target as challenges persist

China cuts 2020 shale gas output target as challenges persist

China has slashed its official target for shale gas production in the medium term by up to a third and now expects to achieve 30 billion cubic meters of output by 2020, according to the country's Ministry of Land and Resources at a briefing in Beijing Wednesday, September 17. Production this year will likely total 1.5 Bcm and is expected to exceed the government's 2015 target of 6.5 Bcm next year, said Peng Qiming, director of geological exploration at the ministry, according to its website. Based on the current pace of development, overall shale gas output will rise to 15 Bcm/year by 2017, before hitting 30 Bcm/year by 2020. "If measures are appropriate, there is hope that production can reach 40-60 Bcm, accounting for roughly a fifth of total gas output," Peng said. The ministry's briefing comes after earlier concerns that while China will achieve the 2015 target, it faces extreme challenges reaching the longer-term target of 60-100 Bcm by the end of the next five-year economic plan in 2020. Both output targets were set in 2012, when the National Energy Administration said the priority to 2015 would be on exploring and developing reserves, with a view to realizing large-scale commercial production by the end of the decade. CNPC, SINOPEC TAKE THE LEAD Production next year will primarily come from state-owned China National Petroleum Corp. and China Petroleum and Chemical Corp. or Sinopec, according to the ministry. Since early this year, Sinopec has trumpeted achievements at its Fuling shale project in Chongqing in central China, which it started developing in 2012. Fuling has certified proved reserves of 106.75 Bcm and production could reach 10 Bcm/year during 2017, up from 600 million cu m/year in March this year. Output is projected to reach 1 Bcm in 2014 and 3.5 Bcm in 2015. Fuling gas is currently piped into the company's 8.5 Bcm/year Sichuan-Eastern China gas pipeline network, which also transports gas from its conventional Qingxi, Puguang and Yuanba fields to cities in the eastern region. In the Sichuan Basin, CNPC is planning to drill 154 wells over 2014-2015 at its Changing and Weiyuan blocks, with investment reaching Yuan 11.2 billion ($1.8 billion). Output at the project was expected to exceed 2.5 Bcm next year, the ministry said. Besides the two companies, the ministry said that state-owned Yanchang Petroleum has been prospecting in the Ordos Basin since 2011 as well, with over 20 wells drilled to date. PROGRESS DESPITE HURDLES Observers have long been skeptical about China's ability to replicate the shale revolution seen in the US because of both above and below ground challenges. These include Chinese companies' lack of technology and skilled personnel, complex geology as well as a less-than-ideal regulatory framework that discourages innovation and competition. The ministry stressed, however, that significant progress has been made over the last few years. There are now 54 shale gas blocks carved out in China, spanning 170,000 sq km (65,637 sq miles). Four hundred wells have been drilled, 130 of which are horizontal. China's shale gas reserves are now close to 500 Bcm, while production has totaled 680 million cu m to date, from virtually zero two years ago. Cumulative investment has reached Yuan 20 billion. Besides this, important discoveries have also been made in the Ordos, Sichuan and Qaidam basins. China has held two shale gas bid rounds so far, in an effort to encourage more competition and involve a wider range of participants in the sector. Yet the ministry later acknowledged that these companies lacked the necessary expertise and in some cases, financial clout to accelerate development as quickly as it had hoped. Another criticism was that the most prospective acreage had been kept by the state-owned giants, resulting in less attractive blocks offered in the bid rounds. While the first bid round saw only two blocks awarded in 2011, the ministry gave out 19 blocks to 16 domestic companies in its second tender in late 2012, none of which had any oil and gas experience. Coal and power companies won eight blocks, while the rest were awarded to investment companies set up by local governments. Foreign firms were not permitted to participate in the bid rounds, although the winning companies were free to bring in both local and foreign partners. To date, operators of most of the 21 blocks given out in the bid rounds have completed 2D seismic acquisition, while drilling has commenced in a handful of them, including the Nanchuan and Chengkou blocks in Chongqing and Cengong in Guizhou, the ministry said. Investment has amounted to over Yuan 2 billion ($325 million). This, however, pales in comparison to Sinopec's plan to invest Yuan 21.5 billion in Fuling over 2013-2015 and CNPC's pledged investment of Yuan 11.2 billion at its Changning and Weiyuan blocks. TECHNOLOGICAL CATCH-UP Peng noted that exploration and development technologies as well as available drilling equipment have reached some measure of localization, resulting in continually declining costs and drilling times for horizontal well. Solitary wells now cost in the region of Yuan 50 million to Yuan 70 million, compared with Yuan 100 million previously, while the average length taken to drill a well has been reduced from 150 days to between 46 and 70 days. Chinese operators last year noted that well costs and drilling completion times in the shale sector were at least four times higher in China than in the US. Peng said the government had pledged to implement a new shale evaluation across the country to prove up more reserves and would also establish more demonstration zones. It intended to offer more acreage up for development, particularly to the private sector. He said the government would also encourage oil companies to devote more efforts to shale exploration at their existing conventional oil and gas blocks. Peng added that the government would work to enhance the regulatory framework to create a better operating environment, giving no further details. The Ministry of Finance had introduced a Yuan 0.4/cu m (6 cents/cu m) subsidy to shale producers in November 2012 to help defray their costs and promote production. >>

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