China’s Shale Quest

China’s Shale Quest
Six years and billions of dollars later, China’s quest to unlock shale resources on a scale as big as the U.S. still seems like a long shot. China’s reserves are deeper and harder to reach than those in North America..

Six years and billions of dollars later, China’s quest to unlock shale resources on a scale as big as the U.S. still seems like a long shot. China’s reserves are deeper and harder to reach than those in North America. 

Background 

Oil shale is an organic-rich fine-grained sedimentary rock containing kerogen from which liquid hydrocarbons called shale oil are produced. It is a substitute for conventional crude oil. Major deposits of shale oil can be found in the US.  The increase in US shale oil production has affected OPEC’s efforts to balance the market and prop up oil prices. The production of natural gas from shale formations has definitely given the United States a new global footing as well as self-reliance. 

China has set its companies a target of producing 30 billion cubic meters (bcm) a year from shale, equivalent to almost half the country's gas consumption in 2008. Potential gas-bearing shales are said to be widespread in China, although as yet undeveloped. In November 2009, US President Barack Obama agreed to share US gas-shale technology with China, and to promote US investment in Chinese shale-gas development.

Although China faces several challenges to develop efficient shale gas extraction, such as - the geology and terrain being much more complex than that of United States - the government is optimistic about China’s future shale gas production. The Ministry of Land Resources has set aggressive targets of 6.5 bcm/yr by 2015 and at least 60 bcm /yr by 2020.

Chinese investment in shale gas exploration between 2009 and 2014 have been estimated at $3.7 billion. In 2017, the shale gas production was 9 bcm by using the indigenous equipment. The majority of Chinese shale reserves are in 3 basins – Sichuan, Tarim and Yangtze Platform, accounting for 89% of the estimated national reserves.

The South China Sea is at the heart of a land and water dispute between China, the United States, and many South-east Asian nations. The South China Sea’s strategic position is not the only reason why the nations are battling for control over the region. Natural gas reserves that exist in the region are estimated to total around 7,500 km³. 

Analysis 

China’s reserves are deeper, harder to reach and more broken up than those in North America. Western companies have also been wary of selling advanced fracking technology to China amid intellectual property concerns. 

Some analysts have questioned whether tight control over exploration and extraction by two massive state-owned oil companies is a model that can work, given that the U.S. boom was driven by innovations from dozens of independent drillers.“If China wants a shale revolution, fundamental industry reform is needed,” said Neil Beveridge, an analyst with Sanford C. Bernstein & Co.

While, China’s demand for new sources of energy has continued to expand, President Xi last year tagged the fight against pollution as one of three “critical battles” the ruling Communist Party must win. That translated into a push to replace coal with gas that was so aggressive it left many in northern China without heat this past winter.

China’s pipeline and liquefied natural imports combined have surpassed Japan, to make it the world’s largest importer of the fuel. And while domestic production has increased, it’s trailed the pace of demand. Bloomberg NEF estimates that China’s dependence on imports will increase to 42 % in 2020 from 39 % last year.

A breakthrough in Chinese shale production is expected to come from the village of Jiaoshiba. The China Petroleum and Chemical Corporation or Sinopec has set up their headquarters to oversee further drilling in its Fuling shale gas project. The company for now is targeting total shale gas output of 10 billion by 2020. CNPC, the nation’s biggest producer is targeting 12 billion cubic meters by the end of the decade and 40 billion by 2035 from developments including Changning, Weiyuan and Zhaotong.

The country’s total gas demand by 2020 is estimated by Bernstein & Co at 325 billion. Analysts say that technology is crucial to closing this gap in China’s shale production.

Counterpoint

Even though China’s shale reserves seem difficult to reach at this point, the fact that they have reverse engineered key equipments for drilling, like the bridge plug and  pressure pumps, tells us that China could indeed succeed in this process. Sinopec is now producing all its shale equipment in-house. This has brought down exploration drilling costs by 40 % from 2010 levels, according to analysts at Wood Mackenzie Ltd. They added that Chinese shale gas production is likely to double the levels of 2017.

Assessment

Our assessment is that China will puts its vast shale reserves to strategic use, unlocking it for energy crisis in the near future. We feel that for the time being, China will continue to import natural gas to meet domestic demands and simultaneously develop technology to drill its reserves.

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