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The Problem With Chinese Shale Gas

I mentioned last week that the Asian gas market is in flux. Prices are changing to account for the dynamic supply-demand balance in the region.

A further illustration came this week, as China announced it will raise natural gas prices throughout the country. Natgas will be hiked by 25%, to around $4.80 per mcf.
The move comes as China is desperately seeking new gas supplies. According to the nation's National Development and Reform Commission, Chinese gas imports will nearly double this year. To 530 Bcf, up from 275 Bcf in 2009.

Part of the hope is that the gas price increase will spur new supplies (along with perhaps reducing industrial demand).

China is indeed a gas-rich nation. Particularly when it comes to unconventional resources. A recent report from the country's Research Institute of Petroleum Exploration and Development estimates Chinese unconventional gas potential at over 420 trillion cubic feet.

Almost none of these resources have been tapped. Coal-bed methane is probably the most well-developed of China's unconventional plays, but even here China National Petroleum Company has drilled only 600 wells throughout the entire country.

Notably, there has been almost no work on Chinese shale gas. Despite trillions of cubic feet of recognized potential in the Sichuan and Songliao basins. Some experimental studies have been completed, but there is currently no commercial shale gas production in the nation.

This week's gas price increase partly addresses this problem. Price is certainly a factor in making shale gas work on a large scale.

But China faces some other difficulties. One of the main ones being access to quality drilling services.

A few years back, several North American companies rushed to tap coal-bed methane plays in China. The results were underwhelming. A big part of the problem was local services companies didn't have the expertise to drill these sensitive wells. These are plays where you need to know what you're doing.

This is even truer when it comes to shale. A poor completion can compromise an entire well, wasting millions of dollars.

The other option would be to import more-experienced drilling contractors from overseas. But unless you're drilling thousands of wells, the added cost of bringing in such services blows the economics on tight-margin plays like shale gas.

This is a classic case of "good ain't cheap, and cheap ain't good". Until local services companies can perfect the equipment and techniques needed for good shale drilling and completion, Chinese shale plays are going to be tough. Even at increased gas prices.

And this isn't just a Chinese problem. There are gas-heavy shales all over the world. The ones that will turn into economic plays are going to be places where gas price, geology and services costs can all be optimized.

By. Dave Forest of Notela Resourcesbr />

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