• Natural Gas News

    China: Progress in Shale Gas Extraction

    old

Summary

PetroChina announced March 13 that domestically developed technology successfully extracted shale gas during testing in the Changning-Weiyuan demonstration zone in the greater Sichuan Basin. The development of its shale reserves could help China in its quest to meet growing demand with domestic supply.

by:

Posted in:

Asia/Oceania

China: Progress in Shale Gas Extraction

Summary

The use of shale gas extraction technology developed at home could allow China to exploit domestic energy sources without the constraints that come with working with foreign partners. China's state-run oil company, PetroChina, announced March 13 that domestically developed technology successfully extracted shale gas during testing in the Changning-Weiyuan demonstration zone in the greater Sichuan Basin. The development of its shale reserves could help China in its quest to meet growing demand with domestic sources. Moreover, the exploitation of shale reserves, most of which are located in inland China, could help Beijing accomplish its goal of developing the interior provinces.

Analysis

In the initial development of its unconventional fields, China required technological capability and capital from international energy companies. Beijing opted to open up shale gas development in the once rather limited energy sector by encouraging domestic firms to cooperate with foreign firms. As China develops its own technical capability, it could enjoy greater freedom in domestic shale development. 

Technology and Geology 

Initial shale gas exploration in China has focused on the greater Sichuan Basin. China's shale deposits differ from those found in the United States, in that they are typically found at greater depth. The basic technology required to access the shale gas is the same -- horizontal drilling and fracturing are necessary to efficiently release the natural gas. But drilling becomes more difficult as the depth increases, in part due to increases in temperature and pressure. Drilling in such conditions necessitates more durable materials and can increase the energy requirement, along with the costs and risks of a drilling operation. 

PetroChina has made advancements in its hydraulic fracturing capabilities alongside successes with horizontal drilling techniques. Since 2011, with the latest round of drilling commencing in January 2013, PetroChina has established a record of technical competency while continuing to enhance its capabilities by drilling several wells in the Changing-Weiyuan demonstration zone. Analysis of production data in early 2013 indicated positive results, including a high flow rate of 120,000 cubic meters from a single well. The company's March 13 announcement is likely related to additional positive analysis of the latest testing round.

Chinese firms interested in shale gas extraction, including PetroChina, have entered into numerous joint ventures and other collaborations with major companies such as Royal Dutch/Shell. These relationships will continue and have likely helped Chinese firms acquire relevant technology, but it appears that PetroChina has been acting mostly alone within the demonstration zone.

Energy Policy and Inland Development

As the largest consumer of energy in the world, China relies on imported hydrocarbons to meet domestic demand. Beijing is looking to increase the contribution of natural gas to the overall energy mix, and both its natural gas consumption and production have increased since 2000. But even with increased production and  technically recoverable reserves of natural gas exceeding an estimated 25 trillion cubic meters, China still imported more than 28 billion cubic meters of natural gas in 2011. Development of its shale gas reserves could eventually enable the country to further integrate natural gas into the energy mix without necessarily increasing its dependence on foreign providers.

As it could fuel the country's continued economic expansion, the location of shale gas reserves could also help Beijing implement plans to rebalance its economy. China will continue to rely on coastal provinces to drive economic growth, and it is the coastal provinces that will still have the largest energy demand. However, Beijing is prioritizing the development of interior provinces as part of a strategy to rebalance its social and economic structures. The abundance of resources in inland China serves as an important pillar for the interior. As part of its move to better utilize its resources to facilitate the economic rebalancing, Beijing is pushing to redistribute resource and energy wealth to the energy-producing provinces. 

At the same time, a significant domestic breakthrough in shale gas development in the Sichuan Basin could fuel economic development without increasing external dependency. Accelerated infrastructure development and rapidly expanding urbanization in the interior are expected to continue to add to China's energy demand. China currently produces natural gas from conventional sources at three main basins: the Tarim, the Ordos and the Sichuan. New, unconventional sources of natural gas will likely be part of a broader energy mix that could serve to meet local demands and eventually national demand as well. 

The local governments in Sichuan and Chongqing, alongside PetroChina, all have an incentive to promote the development of shale basins. Development could mean greater support from the central government in terms of preferential policies or cash, and a breakthrough in shale gas development could raise the status of associated provinces. 

Beijing still must make the leap from initial achievements and announcements to large-scale commercial production. Even then, pipelines are still needed to connect production in the interior to the coastal demand centers and neighboring provinces. We may not see reduced foreign involvement in Chinese shale gas exploitation immediately, but increasing domestic capabilities could eventually give Beijing more control over its resources.

We are pleased to provide this article in cooperation with Stratfor. For more visit http://www.stratfor.com/