China’s Long Road to Shale-Gas Boom

The development of China’s shale-gas industry has moved forward over the past year, but far more remains to be done than has been accomplished if the nation’s ambitious production targets are to be met, according to executives attending an energy conference here.

Here’s a quick rundown on the status of the industry and the daunting challenges ahead:

The Players

Only two players have made progress on the ground so far. Leading the pack is state-run China Petroleum & Chemical Corp., or Sinopec, which said this week that its first commercial shale-gas field is running “ahead of schedule.”

The field, in the Fuling district of Chongqing, will produce around 1.8 billion cubic meters of gas this year, 5 billion cubic meters next year and 10 billion by 2017, the company said.

In second place is Royal Dutch ShellRDSB.LN +0.09% PLC, which has partnered with China National Petroleum Corp. Shell is producing some tight gas in Changbei, Shaanxi province, and is implementing a drilling program in the Sichuan basin, but trails Sinopec in drilling and production.

“A number of the areas have gone into extended well testing and we are getting into the appraisal side of things,” said Maarten Wetselaar, executive vice president at Shell’s integrated gas business. He said an assessment of the initial drilling activity will take more time.

Meanwhile, new players may soon join the ranks and scale up exploration.

Drilling

So far fewer than 100 shale-gas wells have been drilled in China, compared with around 40,000 wells in the U.S., whose shale-gas boom China hopes to replicate. That, of course, leaves a lot of drilling to be done.

But among national Chinese oil companies, only Sinopec has a mandate to fast-track shale-gas production, while PetroChina601857.SH -0.92% remains focused elsewhere, with less than 1% of its total budget devoted to shale-gas drilling, according to Wood Mackenzie.

Beijing has set targets of producing 6.5 billion cubic meters of shale next year and 60 billion-100 billion cubic meters a year by 2020.

“But 6.5 billion cubic meters is not a shale-gas industry. If you get to 6.5 billion cubic meters is that a catalyst to getting to 60 and to 100 billion cubic meters? Because those are the kinds of growth projections that Chinese demand is supporting,” said Gavin Thompson, head of Asia-Pacific natural gas research at Wood Mackenzie.

Water

One of the major challenges for shale gas exploration in China was the availability of water–which is key to the drilling technique, called hydraulic fracturing or fracking, used to access natural gas trapped in shale rock formations.

Shell’s Mr. Wetselaar said that in many instances it was able to access to much deeper water sources through drilling and improve an area’s water supply. “The challenges are very different from locality to locality. But we are focused on making it a sustainable solution,” he said.

Newer fracking techniques have been able to limit the amount of water used, but in several parts of China obtaining water for shale-gas drilling will remain a challenge.

Regulatory environment

China’s recent decisions to boost private-sector participation and implement reforms are expected to help the shale-gas industry, although a lot more needs to be done.

“Additional moves by the national oil companies to open the upstream and downstream to private capital will also expedite the timeline for shale production, even if the government remains unlikely to meet its highly ambitious 2015 and 2020 targets,” Eurasia Group said in a recent report.

In any case Chinese shale gas remains a huge prospect for energy companies given the sheer size of the estimated reserves.

“Relative to United States’ shale-gas plays, the [reserves] of the Sichuan and Tarim basins are potentially enormous and, if successful, could rival the Marcellus in terms of absolute scale,” Bernstein Research said recently. It also said initial well flows in the Sichuan basin appear better than expected while costs were lower than expected.