Singapore — China is likely to miss its 2020 shale gas production target as technical and commercial challenges dog efforts to tap into what are considered the largest shale gas resources outside the US, according to production estimates compiled by market participants.
China is expected to produce between 13 to 17 billion cu m of shale gas in 2020, which falls short of the targeted 30 billion cu m volume in the 13th Five Year Plan, despite a strong ramp-up in upstream activity, according to analysts.
This is a setback for Beijing's long-term energy security goals, and will increase reliance on imports including piped natural gas from Russia and expensive seaborne LNG.
In the longer term, shale performance could determine foreign investment flows into the sector.
"We think the 30 billion cu m by 2020 target is unreachable unless there is a major breakthrough in technology and infrastructure," Jeffrey Moore, Asia LNG manager with S&P Global Platts Analytics, said.
He expects China's total shale gas output to cross the 13 billion cu m mark by 2020.
China's shale gas output will be around 12.5 billion cu m and 15 billion cu m, in 2019 and 2020 respectively, with some downside risk to the numbers due to slow progress in southwestern China's shale projects, Wood Mackenzie analyst Zhang Xianhu said.
The 2020 target was already a reduction from the 60-100 billion cu m target set in the 12th Five Year Plan.
UNTAPPED RICHES
China has the world's second-largest technically recoverable shale gas resources at an estimated 1,115 trillion cu f [Tcf], after the US with 1,161 trillion cu f [Tcf] of resources, according to a 2013 study by the US Energy Information Administration.
Shale drilling in China faces hurdles as shale formations are located in mountainous terrains, where upstream infrastructure is non-existent, well drilling costs are higher, regulatory support is limited and water supplies are scarce.
The commercialization of Chinese shale is both a technological and a policy problem. Many initial contracts were awarded to coal and power companies with no shale or fracking experience whatsoever, and since the drilling began around 2010, many oil majors have quit due to poor prospects.
In early April, local media Caixin reported that oil major BP had exited two shale gas production sharing contracts with CNPC in Sichuan province due to poor drilling results, making it the latest oil major to exit the sector.
BP and CNPC declined to comment.
"We understand that both poor well performance and challenging above-ground conditions contributed to BP's decision," Wood Mackenzie's Zhang said, adding that challenges include complex and deep reservoir geology, low well productivity, marginal economics and infrastructure constraints.
"In addition, we understand BP was chasing deeper targets than those being drilled at Sinopec's Fuling development and PetroChina's three current shale projects," he said. However, poor results at the Fuling and Weirong shale gas fields themselves were a drag on its 2020 projections for China.
Sinopec's Fuling shale gas field in Chongqing province is China's largest shale gas field by output with a production of 6.02 billion cu m in 2018, according to Sinopec's website. Its greenfield Weirong shale gas field in Sichuan province is expected to add 1 billion cu m/year of production by the end of 2019.
Petrochina's shale gas fields in southwest China produced 4.27 billion cu m of shale gas in 2018, mainly from the Changning - Weiyuan shale gas field in Sichuan, according to the company.
REGULATORY PUSH
Nearly half of China's shale resources are in the Sichuan basin with 626 trillion cu f of technically recoverable reserves, spread across the southwestern provinces of Sichuan, Chongqing, Guizhou and Yunnan.
The bulk of shale development has been in the Sichuan basin, led by Sinopec and Petrochina, who have committed to shale gas production targets of 10 and 12 billion cu m by 2020, respectively. Another 8 billion cu m is needed to meet official targets.
China's total shale output in 2018 is estimated to be slightly above 10.29 billion cu m, according to company annual reports. This is a steady ramp up from 8.995 billion cu m in 2017, 7.882 billion cu m in 2016, and 4.471 billion cu m in 2015, according to the Ministry of Natural Resources. It has not published the 2018 numbers yet.
The steady growth comes from policy measures. In April 2015, the government announced subsidies for shale gas produced up to 2020, and in March 2018, the resource tax on shale gas was cut by 30% up to 2021. Drilling costs have also been falling.
Between 2013 and 2015, the cost of drilling a horizontal well in the Sichuan Basin fell 23% to $11.3-$12.9 million, according to the US EIA.
Shale economics in China however will need to get better before production gets bigger.
-- Oceana Zhou, oceana.zhou@spglobal.com
-- Analysis by Cindy Liang, newsdesk@spglobal.com
-- Eric Yep, eric.yep@spglobal.com
-- Edited by Elizabeth Thang, newsdesk@spglobal.com