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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Why China’s Shale Boom Is Struggling

Oil

A few years ago, there was a lot of talk about a Chinese shale revolution as the country’s fast-growing demand for natural gas sparked enthusiasm in the exploration of its potentially huge shale gas reserves. Then the hype died down as it turned out that the enthusiasm was premature. Now it’s back with a vengeance and a set of homegrown fracking technologies that could finally spur the development of those huge resources.

China has recoverable shale gas reserves of 1,115 trillion cu ft, the latest estimate of the Energy Information Administration from 2015 shows. This makes the country the biggest reservoir of shale gas, with Argentina a distant second with a little over 800 trillion cu ft. Yet, it is very unlikely that China will be able to repeat the U.S. shale gas boom.

China’s shale gas deposits are in remote, geologically challenging areas. “Geologically challenging” means that they are in mountainous regions and the gas-bearing rocks are much deeper than they are in the U.S. shale patch. Also, the remoteness of these deposits means there is no established infrastructure for production and transportation of all these trillions of cubic feet of gas.

Of course, China is now known for giving up in the face of challenges, so it has been working to recover these recoverable cubic feet. Because of the geological peculiarities of its shale deposits, local energy companies have developed proprietary fracking methods specifically targeting the local gas-bearing rocks. They have also significantly cut their drilling costs. Compared with 2010, exploration well costs are down 40 percent, according to Wood Mackenzie, and production well costs are down by 25 percent since 2014.

Related: Is Saudi Arabia Losing Its Asian Oil Market Share?

Beijing is helping them along, as well. The government this month cut the resource tax on shale gas by 30 percent to stimulate shale gas production as demand continues to expand at a breakneck pace. There are also subsidies that currently stand at about US$0.048 (0.3 yuan) per cubic meter of shale gas although there are plans to lower them to US$0.032 (0.2 yuan). Since these subsidies are essential for the biggest producers of shale gas in the country, CNPC and Sinopec, chances are the prospect of lowering them will spur more research into improving productivity and lowering costs.

The prospects for China’s shale gas look bright even though the country will be unable to meet its ambitious 30-billion-cu-m production goal for 2020. The reasons it will be unable to meet it are the abovementioned: geology and infrastructure constraints. But China will double its shale gas production to 17 billion cu m a year by 2020, Wood Mac analysts said recently. China will add almost 700 new wells by 2020 at three large fields, two of them operated by PetroChina and one by Sinopec, all in the Northwest. The energy consultancy has estimated the combined investment in the new production capacity at US$5.5 billion.

Related: Can Saudi Arabia Afford Its Megaprojects?

Still, this will not be a repeat of the U.S. shale boom. Rather, China’s shale gas case is a slow evolution of technology and gradual climb of production because the constraints are not of the sort that can be eliminated in no time. According to some, the lack of an open market and lots of competition between producers is also affecting China’s chances at a shale gas revolution, but Beijing has been proving repeatedly that its brand of planned economy surprisingly works, for the most part. Where it doesn’t seem to work—with respect to gas—is in making realistic plans about supply and demand in a way that would ensure there is enough of the former to satisfy the latter.

Last winter, parts of China were left without heating in mid-winter because there wasn’t enough gas to replace the phased-out coal generation capacity. Now, though total gas production in the country is growing, it is not growing fast enough to catch up with demand. Perhaps, at some point in the future it will, if the shale drillers can find more ways to extract the gas from the shale rock cheaply and efficiently. For this, they may require assistance from international energy companies.

By Irina Slav for Oilprice.com

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