Saturday, May 14, 2011

China Plans to Exploit its Shale Gas Resources

The Institute for Energy Research (IER), Apr 27, 2011
America’s shale gas production alone has exceeded that of total Chinese gas output. That gives us a lot of confidence,” said Zhang Dawei, deputy director of the Strategic Research Center for Oil and Gas in the Ministry of Land and Resources [please see remarks below -- D.R.].

China is looking at the production and resources of shale gas in the United States and is planning to emulate them. China’s technically recoverable resources of shale gas are estimated to be about 50 percent higher than those in the United States, which ranks second to China in a recent assessment of shale gas resources in 32 countries [also, please see my post/table "Estimated Shale Gas Technically Recoverable Resources for Select Basins in 32 Countries -- EIA," here -- D.R.]. In November 2009, during a state visit to Beijing, President Obama signed a cooperation pact with China that provides for U.S. expertise in drilling for shale gas. [...] China’s goal is to have about a fifth of its natural gas production come from unconventional gas, mainly shale gas, by 2030.

China’s Natural Gas Production and Consumption

In 2009, China produced 2,929 billion cubic feet of natural gas and consumed 3,075 billion cubic feet, importing 146 billion cubic feet. The country relies on natural gas for only 3 percent of its energy consumption, getting more than 70 percent of its energy from coal, followed by 19 percent from oil and 6 percent from hydropower [in 2008]. The government is planning to increase consumption of natural gas to a 10-percent share by 2030, and will need to continue importing gas through liquefied natural gas facilities and pipelines from neighboring countries. The [U.S.] Energy Information Administration projects that gas demand in China will more than triple by 2035, growing at 5 percent a year.

China’s government is looking to foreign investors to help develop production of its unconventional gas resources—coal bed methane and shale gas. China’s technically recoverable resources of shale gas are estimated to be 1,275 trillion cubic feet and its technically recoverable resources of coal bed methane are estimated at 350 trillion cubic feet. According to the Ministry of Land [and] Resources, China’s goals regarding shale gas are to discover 35 trillion cubic feet of recoverable shale gas reserves, build 500 to 1,000 billion cubic feet per year of production capacity and produce 8 to 12 percent of China’s total natural gas from shale gas by 2020.

Shale gas is one of China’s top targets for technological breakthroughs in its five year plan for 2011-2015. China’s Ministry of Land and Resources intended to hold its first auction of shale gas blocks in the first quarter of this year [it is already overdue -- D.R.], delaying it from November of last year. The auction is for eight exploration blocks in four provinces covering 18,000 square kilometers [please see update below -- D.R.]. [CNPC's listed arm,] PetroChina, which produces about 80 percent of China’s total gas output and is the world’s second-most valuable energy company, completed its first [horizontal] shale gas well in the Sichuan province last month [March 2011]. In February, PetroChina announced it would buy a $5.4 billion stake in Calgary-based Encana Corp’s shale gas assets. A China National Petroleum Corporation executive indicated, “We don’t care much about whether the market believes it’s a good or bad price. The top priority is gaining access to a resource and mature technology. Price is only a secondary consideration.” [Also, please see remarks below -- D.R.] [...]

Six months after President Obama’s visit in 2009, China and the United States set up a task force and agreed to jointly conduct a shale gas project, assessing an aging oil basin in China that was not very fruitful. According to industry officials, the U.S. government and companies have invited Chinese geologists for technical workshops and field trips, but Chinese firms are less interested about sharing technical information, or opening up new blocks for resource studies.

As of the end of 2009, China is estimated to have almost 21,000 miles of natural gas pipelines and is expanding at a rate of 6 percent per year. The Chinese government plans to construct 14,400 miles of new pipelines between 2009 and 2015. The West-East Gas Pipeline, which was commissioned in 2004, is China’s largest natural gas pipeline at 2,500 miles, linking major natural gas supply bases in western China with markets in the east. The pipeline’s annual capacity is 424 billion cubic feet and there are plans to increase it to 600 billion cubic feet. Four additional west-to-east pipelines are also planned with the second one to be completed in 2012.

China’s first import natural gas pipeline, the Central Asian Gas Pipeline, began operations in December 2009, carrying natural gas imports from Turkmenistan, Uzbekistan, and Kazakhstan. The pipeline spans 1,130 miles and [had an initial] capacity of 200 billion cubic feet per year with plans to increase gas supply to 1.4 trillion cubic feet per year. China has signed agreements with Uzbekistan, Kazakhstan, Russia and Myanmar for gas supplies and additional pipeline construction in the future.

China imported its first shipment of liquefied natural gas in the summer of 2006 and imported 730 million cubic feet per day in 2009 and 1,120 million cubic feet per day in the first half of 2010. China has three regasification terminals, four under construction, and others in the approval process. China receives its liquefied natural gas from Australia, Indonesia, Malaysia, Qatar [and Russia -- D.R]. Because international liquefied natural gas prices are higher than domestic gas since their contracts are indexed to oil prices, competition may be greater from domestic gas, particularly shale gas, and neighboring sources in the future. For China to develop its shale gas resources, its natural gas pipeline system, which is about a tenth of the size of the system in the United States, would need to be significantly expanded, requiring billions of dollars. [...]


China has found another avenue for increasing its much needed energy supplies—shale gas. China is estimated to have more technically recoverable shale gas resources than any other country in the world. And, its people are very good at learning from and imitating experts around the world in extracting resources. Here again China is oblivious to environmental issues as it is in its use of coal for over 70 percent of its energy and its mining of rare earth minerals used in making certain renewable technologies and in weapon systems, where China dominates the global market.

For the United States, the country with the second largest technically recoverable shale gas resources, environmental concerns are at issue with demonstrations in Texas, New York, and Pennsylvania; public forums sponsored by the Environmental Protection Agency; and the threat of more studies to discredit the strides that hydraulic fracturing and horizontal drilling have made to provide reasonably priced natural gas. While the United States has the technical expertise to develop its shale gas resources, it is challenged by those who want the American public to pay high energy prices. China, on the other hand, wants to provide a better standard of living for its people and is developing any resource that will pave the way. [Read more]

(In 2009, U.S. shale gas production amounted to 3.11 trillion cubic feet/tcf vis-à-vis total Chinese dry natural gas output of 2.93 tcf. In 2010, U.S. shale gas production jumped to 4.87 tcf, constituting 23 percent of total U.S. natural gas production, compared with 0.39 tcf in 2000. Сhina's natural gas production rose to 3.3 tcf in 2010, compared with 0.96 tcf in 2000. Separately, China's third-largest oil company and the country's largest offshore oil and gas producer China National Offshore Oil Corporation/CNOOC struck two deals with leading U.S. shale gas player Chesapeake in October 2010 and January 2011, giving it access to drilling leases in Texas, Wyoming and Colorado. "Chesapeake has accumulated abundant experience in drilling and completion in various U.S. shale plays," CNOOC said in a statement emailed to Reuters. "The techniques and experiences we learn from the U.S. shale projects will benefit our potential participation in other areas in the future." UPDATE: Four blocks were offered in the first tender issued June 27, 2011, all located in the Sichuan basin. The blocks in the tender are mostly in the southwestern Chongqing municipality and Guizhou province and cover an area of 11,000 square kilometers, smaller than an earlier announced plan to offer eight blocks with an area of 18,000 sq km. Only Chinese state-owned companies were invited to bid: PetroChina, Sinopec, CNOOC, Shaanxi Yanchang Petroleum, CUCBM and Henan Provincial Coal Seam Gas. China has awarded two out of four shale gas blocks offered in its auction of the unconventional gas resource to China Petroleum & Chemical Corp., i.e. Sinopec, and Henan provincial coal seam gas company, a Chinese government official said Wednesday July 6, 2011. "Both blocks covering about 2,000 square kilometers [each - D.R.] are in the Chongqing area. The contracts will be signed shortly," an official with the Ministry of Land and Resources said. Sinopec won the Nanchuan block and Henan Provincial Coal Seam Gas was awarded the Xiushan block---please see Exhibit 2 or map from the Bernstein Research, July 7, 2011. A second round will take place later this year. -- D.R.)


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