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Chinese oil companies attempt to slash shale gas drilling costs


Chinese companies are aiming to cut costs and enhance efficiencies as they become more familiar with shale gas development in the country, delegates at an unconventional gas conference said in Beijing this week.

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State-owned Sinopec has been focused on the gas-rich Sichuan Basin, where it already has experience working on complex fields with high sulfur in tight reservoirs, particularly with its Puguang and Yuanba projects.

Its main shale development is the Fuling project in the Sichuan Basin in Chongqing covering up to 500 sq km. Sinopec said in March that it hoped to reach 1 billion cubic meters/year of production capacity at the project by 2015.

Ma Yongsheng, the company's chief geologist, told delegates at the Global Unconventional Gas Summit on Tuesday that Fuling has produced more than 20 million cu m since late last year from an ongoing trial production, and daily output has hit 60,000 cu m of gas.

There are now five wells with stable output. Working on the project has already yielded some efficiencies, Ma said, with the drilling time for each well cut by half to about three months.

Ma added that the cost of one shale gas well is now around Yuan 90 million ($14.7 million), including costs for drilling, fracturing and procurement of services from technical service companies.

"We're also considering cutting the costs by buying domestic drilling equipment, drilling wells in a large scale," Ma said.

Jin Shumao, vice president of SPT Group, a local oil services company, said he expects the total cost for each well to drop to around Yuan 40 million in a few years.

"It usually takes about 3 1/2 months to four months to complete a drill in China, while in the US for a well with the same depth of around 2,000-3,000 meters, it only takes about a month to be completed," said Bao Shujing, who heads the shale gas division at the China Geological Survey and was formerly in charge of Sinopec's shale gas operations.

The cost of drilling a well in China is around Yuan 80-90 million, compared with about Yuan 20 million in the US, Bao said, adding that using domestic drilling equipment will cut costs by about 25% to a third, while drilling modular, factory-like wells could help cut costs further.

Li Minglu, director of oil and gas department at the Sichuan Provincial Energy Administration, said that China National Petroleum Corp. and Sinopec produced a total of 70 million cu m of shale gas in Sichuan in 2012 and are expected to produce 100 million cu m this year, with CNPC responsible for most of the increase.

CNPC is also focusing on the Sichuan Basin. Besides its own blocks, it has a production sharing contract -- China's first shale gas PSC -- with Shell at the Fushun-Yongchuan block.

According to Tang Tingchuan, director of development strategy at CNPC's policy research office, average gas production at the Yang 201-H2 horizontal well at Fushun-Yongchuan reached 430,000 cu m per day in the first half of October 2012. The gas is already being pumped into neighboring pipelines.

There has been speculation of a third shale gas bid round being introduced in the coming months, although Yang Hulin, director of the development strategy and research department with the Ministry of Land Resources, said this was still undecided.

The Ministry of Land and Resources, which organizes the shale tenders, is also considering allowing foreign companies to take part directly in the bid round, he said.

The ministry offered 20 blocks spanning 20,239 square km (7,814 sq miles) across eight provinces and cities in the second bid round a year ago. Foreign firms were not permitted to participate in the bid round, although the winning companies were free to bring in both local and foreign partners.

Nineteen blocks were eventually awarded to 16 companies, none of whom had any prior oil and gas experience. The ministry acknowledged in July this year that many of the companies lacked skilled and technical personnel and had limited financial resources. Coupled with the complex geology, the companies' progress was slow.

Yang said most of the operators of the second bid round blocks have completed their geological surveys, while a few have already started drilling operations.

"As those companies are not oil companies, they are still exploring and learning, it might take some time for them to achieve their promised targets," he said.

Tang from CNPC echoed that: "It seems that those companies are not drilling with great enthusiasm, as the technical challenges seem to be bigger than they expected. It's not just about money, and you need to have good technology."

--Song Yen Ling, with staff,
--Edited by Meghan Gordon,