BP to exit China shale gas exploration as Shell signs up for shale oil study

Shell has signed an agreement with Sinopec of China to jointly study the potential development of shale oil in the Dongying Trough in the eastern province of Shandong. Meanwhile, BP is reported to have unveiled plans to stop exploring for shale gas in China due to poor drilling results, leaving the sector in the hands of domestic companies.

Commenting on the news, Wood Mackenzie’s Eastern Asia Upstream Research Analyst Xianhui Zhang says: ‘We understand that both poor well performance and challenging above-ground conditions contributed to BP's decision. Such difficulties – both for national oil companies (NOCs) and oil majors – highlight the unique challenges of developing shale gas in China. These include complex and deep reservoir geology, low well productivity, marginal economics and infrastructure constraints.’

‘China’s shale gas formations tend to be deeper, more fragmented and less pressurised compared to the US. Much of the discovered resource is located in mountainous terrain; meaning it takes more capital, labour and time to develop. In addition, we understand BP was chasing deeper targets than currently being drilled at Sinopec's Fuling development and PetroChina's three current shale projects.’

‘The announcement underscores the difficulties facing international oil companies (IOCs) looking to build an upstream onshore business in China. Despite a large number of shale agreements being signed with IOCs over the last decade, all have now failed and been abandoned. If the government wants the NOCs to hit its ambitious targets with assistance from experienced foreign companies, it would need to offer further incentives. We think that offshore China provides a stronger commercial opportunity for foreign companies, compared to more challenging onshore developments.’

‘Wood Mackenzie forecasts 15bn cm/y of shale gas production by 2020; significantly lower than the government’s target of 30bn cm. While we still expect double-digit growth in shale gas output this year, development challenges remain. Shale gas is an important part of China’s gas supply story in the long-run, but for now it is a minor contributor.’

• In related news, in late March, Sinopec reported a proven reserve of 124.7bn cm for the Weirong shale gas field in Sichuan Province, where it plans to boost annual output to 1bn cm by the end of this year. Meanwhile, the exploration well Dongye-1 in the Dingshan-Dongxi block, which is over 4,200 metres deep, had a daily output of 310,000 cm in test production, representing a technical breakthrough, according to Sinopec.