During the first two months of 2021, the Chinese oil and gas giant Sinopec managed to bring 28 new shale gas wells on stream in the country. The company also announced that the shale gas production from its major Fuling field jumped by 20% compared to last year. And despite the recent collapse in oil and gas prices, as well as the uncertainty brought by the Covid-19 pandemic, Sinopec remains optimistic on the future of shale gas. Its latest achievement was the completion of the first phase of a new shale field in Weirong, adding 1 billion cubic meters of shale capacity.
This series of breakthroughs reveal a more global trend: a possible revolution in the Chinese shale gas sector. But in a country traditionally relying on conventional gas resources, how realistic is this “shale boom”?
A “coal to shale gas” switch?
The share of natural gas in China’s total energy consumption reached a modest 8% in 2019. However, this figure is expected to climb as a result of China’s strategy to move away from coal, resulting in rising industrial and residential gas consumption. One of the drivers of the rise in gas production is likely to be shale gas, which represented 6% of total gas production in the country in 2019.
Inspired by the fracking boom of the 2000s in the United States, China is eager to reproduce a similar trend domestically. Its proven geological reserves amount to 31 trillion cubic meters and are the world’s largest shale gas reserves, according to the US Energy Information Administration. Being the second country in the world to achieve shale gas commercialization, China expects its shale gas production to grow in the coming years, and already plans a 34 billion cubic meters output in 2021. To do so, it will rely on its main asset: the Sichuan basin, where it has bet on doubling shale gas production through 2025.
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After releasing a “Development Plan for Shale Gas” in 2013, the Chinese government multiplied incentives to make the shale gas sector take off. Beijing did not hesitate to heavily invest in exploration projects: in total, $3,7 billion was dedicated to shale exploration projects. More recently, Beijing has also simplified regulations in the shale gas sector to attract investment flows and gave tax breaks of 30% to shale gas producers until 2023.
However, for a long time, shale gas in China has been far from a success story. In particular, the production in the Fuling basin did not substantially progress and did not meet expectations. Located in the center of the country, this field was discovered by Sinopec in 2014. It was displaying promising conditions for drilling, and reserves of 2,1 trillion cubic meters.
A geological and technological struggle
International majors such as Chevron, BP, and Shell, involved in joint projects with Chinese oil companies, also decided to take a chance in shale exploration. However, they eventually had to renounce, deceived by poor drilling results. The large-scale development of shale gas never became a reality, even though the country’s production was slowly gaining pace. And since touting a 30 billion cubic meters shale extraction capacity by 2020, Sinopec had to revise its forecasts multiple times.
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One of the explanations for this string of unsuccessful attempts is China’s challenging geological environment, with deep reservoirs (on average 3200 meters), located in often difficult-to-access areas. This barrier, coupled with risks of water stress in shale gas extracting regions like Sichuan, raised drilling costs and discouraged investment from oil majors. Concerns about underground water pollution, resulting from the release of toxic elements in the water during the process of hydraulic fracturing, also started to emerge in the decision-making process.
Combining green goals with the shale boom
Beyond a simple increase in shale gas output, China decided to kill two birds with one stone, seizing this opportunity to pursue environmental goals. The country even started pilot projects to produce hydrogen from shale gas, and Sinopec said it intends to combine the shale boom with a 50 % reduction in methane intensity of its gas fields, in line with its pledge to achieve carbon neutrality by 2050.
Furthermore, developing domestic shale gas is an opportunity for China to reduce its hefty natural gas import bill. In particular, China intends to move away from Australian LNG, closing large LNG supply contracts with market-leader Qatar in recent weeks. The recently worsened diplomatic relationship with Canberra is a good reason for Beijing to become more energy-independent.
In parallel, this shale gas development will potentially give China leverage in negotiating lower prices for Russian piped gas and with foreign LNG suppliers. In fact, for the Russian gas flowing through the Power of Siberia pipeline, S&P estimates the demand to grow by 32% compared to 2020, increasing the need to get affordable prices.
By Tatiana Serova for Oilprice.com
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