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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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China’s Shale Industry Faces Numerous Challenges

China has bet on developing its vast shale gas resources to boost its natural gas supply as demand surges. Despite recent shale production surprises to the upside, China still has several major challenges to overcome if it were to replicate, at least partially, the American shale boom.

China is estimated to have a lot of shale gas resources, even higher than those in the United States. China actually has the highest technically recoverable shale gas resources in the world, as per EIA estimates.

However, Beijing has struggled to develop those huge resources. The challenges arise because some of the most prolific basins are twice as deep underground as the shale gas resources in some of the most extensive U.S. shale gas plays. The challenging geology leads to higher well drilling and completion costs, lower margins for exploration and production companies, and, at times, mixed results in gas flows.    

China’s Latest Shale Gas Output Surprised To The Upside

Despite all those constraints, Chinese state-controlled oil majors—the only ones currently developing the domestic shale gas fields—have recently reported higher production than previously expected.

For example, oil and gas giant Sinopec brought 28 new shale gas wells on stream in January and February, and shale gas production from its major Fuling field jumped by 20 percent compared to last year.

Sinopec and another energy giant, PetroChina, are actually the only material shale gas producers in the country. Nearly all of the activity is focused on the Sichuan basin in central China.

Despite surging by 30 percent year over year in 2020, China’s total shale gas output fell short of the government target for 2020, Wood Mackenzie said this week. At more than 20 bcm (1.9 bcfd) in 2020, shale gas production reached only two-thirds of the government’s 2020 target of 30 bcm. Still, the production was almost 10 percent higher than WoodMac’s forecasts, said Gavin Thompson, Vice Chairman, Energy – Asia Pacific at the consultancy.

Related: Brazil Reports 6% Oil Output Decline In Q1

China’s state-owned majors will continue to look to boost shale gas production because of the government mandate to increase domestic gas supply amid soaring demand.

“With the government seeking both to enhance energy security and increase the share of gas in the energy mix, the NOCs were never going to be able to put shale gas in the ‘too difficult’ bucket indefinitely,” Xianhui Zhang from Wood Mackenzie’s China upstream research team said.

The question now is—can the Chinese oil and gas giants succeed in drilling ultra-deep wells to reach and unlock the deeper-lying resources at reasonable costs?

Challenges To China’s Shale Boom Remain

Most of China’s current shale gas is produced from the so-called ‘middle shale’ plays in the Sichuan basin, which are 2,000-3,500 meters (6,560-11,483 feet) deep, WoodMac says. Chinese majors are now looking at wells deeper than 3,500 meters and even deeper than 4,500 meters (14,764 feet). That’s approximately double the depth of most shale wells in the U.S. Marcellus shale gas play.

Considering the depth, it’s no surprise that drilling and well-performance results have been a mixed bag of hits and misses.

“But this is where we believe the Chinese NOCs see their shale future – going ultradeep to unlock new gas resources,” WoodMac’s Zhang says.

Can Big Oil Lure Investors Back?

The problem with ultra-deep shale gas wells is not only purely the geological and terrain constraints. It’s well economics and margins, too. The deeper the well, the higher the cost to drill, complete, and develop.

As per Wood Mackenzie’s estimates, a deep shale development well costs US$9 million to drill and complete. This is US$2 million higher than the cost to drill and complete one of the ‘middle shale’ wells, from which most of China’s current shale gas production comes.

To bring down well development costs for the super-deep shale wells, the Chinese majors will need technological advances and breakthroughs because not all the techniques and equipment for middle-shale wells may be applicable to a well twice the depth. In addition, China needs to cut its reliance on imported high-pressure and high-temperature equipment if it wants to slash development and breakeven costs, according to WoodMac.

“Neither challenge will be straightforward to overcome,” Zhang said.

Foreign Majors Fled China’s Shale

In a sign that the unique challenges to China’s shale development will not be easy to overcome in the near term, international oil majors have already abandoned shale exploration in China. In 2019, BP was one of the last majors to quit drilling for shale gas in China because of poor exploration drilling results.

“I think it’s fair to say that most of those IOCs who ventured into Chinese shale in the past are not queuing up to repeat the experience. It’s not impossible that some might consider opportunities in future license rounds if high-quality acreage is on offer, but don’t count on it,” WoodMac’s Zhang said. 

China’s shale boom is now in the hands of its state-owned supermajors, which will continue to pour investment into shale and try to meet government directives for higher production.

Despite recent increases in output, the challenges with technology to dig ultra-deep shale wells and the high development costs could turn out to be too big to overcome, and China’s shale gas industry may never come close to replicating the American shale boom.    

By Tsvetana Paraskova for Oilprice.com

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