IHS Global Insight Perspective | |
Significance | Six blocks in the Sichuan basin will reportedly be offered to four Chinese companies covering an area of approximately 40,000 sq. km. However, foreign oil companies may later sign production-sharing contracts (PSCs) with the winning bidders, given that domestic players are still developing their technical expertise in the sector. |
Implications | The licensing round is likely to cover areas of the Sichuan basin where recent shale gas studies have been completed, or where exploration wells testing shale gas have been drilled in shallow reservoirs. These areas could speculatively include the 2,500 sq. km Changning area, the Weiyuan-Luzhou area, and the Qinnan depression in the Sichuan basin. |
Outlook | The launch of the bidding round will be a first step for China's government on the way to realising a shale-gas production target of between 15 bcm and 30 bcm by 2020. Key uncertainties remain regarding the fiscal frameworks to govern shale gas development and whether the domestic gas-transmission network will be able to handle additional volumes of conventional and unconventional gas going forward. |
Hunting For Shale Gas
According to Upstream Online, China's Ministry of Land and Mineral Resources will soon launch its first licensing round for shale gas acreage in the Sichuan basin. Six shale gas blocks will reportedly be offered covering an area of up to 40,000 sq. km in Sichuan and Guizhou provinces according to unidentified sources familiar with the bidding round cited by Upstream. The exact locations of the blocks have not yet been revealed. Only four companies have been invited to bid in the shale gas round. These are the three NOCs—China National Petroleum Corp (CNPC), Sinopec, China National Offshore Oil Corp (CNOOC), and Shaanxi Yanchang Petroleum Corp, which is owned by the Shaanxi provincial government. Nevertheless, sources have suggested that the eventual winners could then sign production-sharing contracts (PSCs) with foreign companies to explore and develop the blocks. Bidding will commence after official paperwork for the round is completed later this month.
The licensing round is likely to cover areas of the Sichuan basin where recent shale gas studies have been completed, or where exploration wells testing shale gas have been drilled in shallow reservoirs. The Changning area, which covers 2,500 sq. km spanning the Junlian, Gaoxian, Gongxian, Xingwen, and Xuyong counties in Sichuan province and Weixin county in Yunnan province is one potential area where shale gas acreage could be open for bidding. According to IHS Global Exploration & Production Service (GEPS), PetroChina-Sichuan started a 2D seismic survey in the Changning area in May 2010 and a couple of exploration wells called Ning 201 and Ning 2 have already been drilled to test the Cambrian formations. Current estimates of the shale gas resource potential in the 55,000 sq. km Cambrian formation are a promising 140 tcf, although how much is extractable has not been revealed. The Weiyuan-Luzhou area of the Sichuan basin is also believed to have positive shale gas potential. PetroChina and upstream explorer Newfield already carried out a joint study on shale gas in the Weiyuan gas field, where a number of previous wells had encountered gas shows in shale formations. Gas reserves in the area are estimated at between 24 tcf and 29 tcf from the Silurian and Cambrian shale formations in the Weiyuan-Luzhou area. Other areas of the Sichuan basin believed to have shale gas potential include a 2,000 sq. km area known as the Kaili block, located in the Qinnan depression in Guizhou province. The Fushun-Yongchuan block in southern Sichuan province, where Shell and PetroChina signed a joint evaluation agreement in 2009, is also believed to be prospective for shale gas.
The launch of a shale gas bidding round is a significant new development in China, where exploration acreage is usually secured by NOCs through a registration system with the Ministry of Land and Mineral Resources. China's NOCs are still developing their technical skills in shale gas exploration and development and will therefore need foreign assistance to explore and extract shale gas. In previous months, NOCs have opened talks with foreign companies for development of shale gas acreage. BP and Sinopec have been in talks to develop the Kaili block, while CNPC has signed a letter of intent (LoI) with ConocoPhillips for a 3,000-sq.-km block between Sichuan and Chongqing. Teaming up with foreign companies can help improve the competitive bidding position of NOCs, which will also be judged partially on solid investment and exploration commitments.
Outlook and Implications
The expected launch of the shale gas bidding round suggests that Chinese government departments are supportive of NOCs' efforts to develop shale gas resources. The NOCs' moves to swiftly progress shale gas exploration are due to rapid growth in domestic gas demand in recent years and the successes shale gas has enjoyed in boosting U.S. gas production, which will justify investments in research and development to identify best practices for exploration and extraction. PetroChina's upstream gas operations are a growing source of profits, which will probably mean the company rigorously pursues shale gas to consolidate its dominant position in a rapidly expanding market.
China's government is aiming to produce between 15 bcm and 30 bcm of shale gas by 2020 through the development of between 20 and 30 projects, an ambitious production target when it is considered that it took the United States 30 years to increase output to around 295 mmcm/d. Preliminary estimates suggest that China has a positive shale gas resource potential with reserves of between 50 tcm and 100 tcm, and Chinese oil companies look likely to benefit from technology expertise provided by foreign companies keen to invest in the sector and from establishing partnerships with leading developers of shale gas in the United States (see China: 11 October 2010: CNOOC Swoops on Chesapeake's Eagle Ford Shale Acreage).
Nevertheless, uncertainties remain for the development of shale gas in China. The first concerns a lack of clarity on fiscal frameworks to manage exploration and exploitation of shale gas. The costs of shale gas exploitation are generally higher than for conventional fields due to the need to drill more wells and due to the expense associated with hydraulic fracturing treatments to improve permeability, and with horizontal drilling to create maximum borehole surface area. China's decision to increase onshore gas wellhead prices by 230 yuan (US$34.56) per thousand cubic meters on 31 May this year will help to make shale gas exploration more commercially viable. The National Energy Administration (NEA) has indicated that it plans to launch a new policy to encourage shale gas development, which could include tax and royalty breaks. More details of this policy are needed to access the economics of shale gas investments in China. Another uncertainty relates to midstream capacity to support rapid growth in conventional and unconventional gas production in China. China is still in the process of establishing a nationally integrated gas-transmission network, which is one reason why the gas market remains supply constrained. The decision to initially bid out acreage in the Sichuan basin could be because the area already has a relatively advanced gas-transmission system through the Sichuan Gas Pipeline network and Zhongxian-Wuhan pipeline. With only CNPC and Sinopec constructing major gas-transmission lines there may be concern over whether the domestic infrastructure build can keep pace with future output growth from the upstream sector.