Beijing holds on to national shale gas ambitions

The Chinese government has outlined a shale gas development plan that aims to achieve a huge rise in output from 2020–2030, but it acknowledges that it will be difficult to meet this target, reports Petroleum Argus.

China’s National Energy Administration (NEA), under the NDRC economic planning agency, has expressed continued optimism for the country’s shale gas sector, but admits that competition from alternative energy sources, a lack of investment and geological issues will all be challenges. Two years ago the NEA downgraded a previous 2020 shale gas target of 60bn–100bn cm set by the Land and Resources Ministry (MLR) to 30bn cm/y. China is still aiming for 30bn cm/y of shale gas production by 2020 — but the rate of output growth will then accelerate, reaching 80bn–100bn cm/y by 2030.

Around 10 prospective areas for shale gas development have been identified, the NEA says, with important discoveries already made in these regions, most notably in the south-west. State-controlled PetroChina’s Changning-Weiyuan block in Sichuan, its Zhaotong block in Yunnan and fellow state-controlled Sinopec’s Fuling block in Chongqing have all started commercial production.

However, China produced just 4.5bn cm of shale gas last year, far short of its 6.5bn cm target. China reported technically recoverable shale gas reserves of 21.8tn cm and 544.1bn cm of proven reserves in 2015. The country now has the technology to drill to a depth of 3,500 metres, with several parts of south-west China having wells beyond this depth. Around 600 sq km of the Fuling area has wells that average a depth of 4,000 metres, comprising geological reserves of 477bn cm. But shale gas developments face considerable technical challenges, the NEA says.

Sinopec is the frontrunner in shale gas development in China, having added 5bn cm/y of production capacity last year and targeting 10bn cm/y by 2017. Fuling produced 2.7bn cm in the first six months of this year, and is on course to reach 6.7bn cm over the whole year. But Beijing has cut the country’s shale gas subsidy to 0.30 yuan/cm ($1.30/mn Btu), from Yn0.40/cm, and plans to reduce this further, to Yn0.20/cm by 2019–2020. Profits at Fuling are already marginal.

The MLR has identified prospective blocks for future development, including Zhengan in Sichuan province, Laifeng-Xianfeng in Hubei, the Baojing and Longshan blocks in Hunan, the Zhongxian-Fengdu block in Sichuan and the Chengkou block in Chongqing. But high development costs mean that gas in China is struggling to displace coal and oil as a fuel source as the economy slows, the NEA says.

Cross-country strain
Coal is around 40% more profitable than gas as a power generation fuel in China. Shale gas, in particular, will struggle to gain market share against more competitively priced imported gas – partly because of high cross-country transmission costs. Regasified LNG cost around $8.90/mn Btu in China in August, compared with $9.20/mn Btu for domestic pipeline gas. Gas constitutes just 5.9% of China’s primary energy mix, compared with an average 24% in other parts of the world. Beijing is aiming for a 10% share by 2020.

Chinese shale gas development also faces competition from massive nvestment in gas import infrastructure. The rapid development of LNG terminals in the past 10 years will take the country’s import capacity to 50mn t/y by next year, although many are under-utilised because of competition with domestic gas supplies.

China has committed to taking 85bn cm/y of central Asian gas after 2021, with imports last year already totalling 30bn cm. Protracted negotiations with Russia have produced at least three planned cross-border pipelines to China, with supplies totalling in excess of 100bn cm/y.

Figure 1: China’s apparent gas demand

Source: Petroleum Argus