[NGW Magazine] China builds its gas businesses
China’s domestic gas production faces more opportunities for growth than ever, relying for now on relatively lower-cost imports of pipeline gas and LNG; but with state help and technology, it hopes to diversify its energy mix and capacity.
China’s domestic gas production faces more opportunities for growth than ever, relying for now on relatively lower-cost imports of pipeline gas and LNG; but with state help and technology, it hopes to diversify its energy mix and capacity.
China is already the world’s largest shale gas producer after the US and Canada, recording an output of 7.88bn m³ in 2016, according to the country’s ministry of land and resources. This is despite the fact that the state council of China has only been managing its growth since 2011. By 2020, the proved reserves of shale gas will exceed 1.5 trillion m³, according to the state council in early 2017.
China’s shale gas output increased 50.4% year on year to reach 1.15bn m³ in March 2017, according to China’s National Bureau of Statistics. In the first quarter of 2017, shale output was 2.67bn m³, up 17.4% compared with the same period last year.
According to the state council, the fast growth was mainly due to the Changning-Weiyuan shale gas pilot zone in southwest China’s Sichuan province, which is run by the country’s oil and gas giant China National Petroleum Corporation.
Other important shale gas projects in China include the Changbei natural gas project in partnership with Anglo-Dutch Shell; the Chuangdongbei project in partnership with US major Chevron and the Luojiazhai Sour Gas Field. Upcoming projects include Nejiang-Dazu and Rongchangbei shale gas projects, operated by CNPC for the first time in co-operation with UK major BP.
State subsidies aimed at encouraging shale gas exploration are a significant factor for China’s domestic shale gas producers. These subsidies might have even been too effective as they started to decrease in 2015, just four years after shale gas became a focus area for the government.
The finance ministry announced a subsidy of $0.049 (0.3 yuan)/m³ was available for producers for the period 2016-2018, down from the 0.4 yuan on offer for the previous, 2012-2015 period.
From 2019 to 2020, the subsidy will be further lowered to 0.2 yuan/m³. According to the ministry, the policy is adjusted in accordance with the sector’s growth, technology and changing costs. The financial assistance enabled breakthroughs in shale gas exploration, in terms of capacity and drilling techniques. CNPC’s annual report for last year highlighted several new shale gas exploration technology improvements such as logging evaluation, used in the development of shale gas in South Sichuan.
An imaging-while-drilling system generates images by scanning the well perimeter in a rotary manner in a field test, which allows horizontal wells to improve their hit rate in complex reservoirs. Another is the openhole expansion pipe plugging technology, which creates a cost-effective and safer horizontal drilling design, shortening the drilling cycle by 10-20%.
China’s offshore gas and liquids production
According to China National Offshore Oil Company (Cnooc), at the end of 2016, about 62.5% of the company’s net proved reserves of 3.88bn barrels of oil equivalent and 65.2% of its net production were derived from offshore China.
Oil and natural gas exploration, development and production offshore covers 257,292 km², encompassing Bohai, the western South China Sea, the eastern South China Sea and the East China Sea, either independently or jointly with foreign partners, who have signed production-sharing contracts. The western South China Sea is one of the most important natural gas producing areas while Bohai and the eastern South China Sea are important crude-producing areas. In the first half of 2017, Cnooc reported five successful discoveries and two appraisals in the Wushi, Weizhou and Wenchang gas fields in the western South China Sea. CNOOC’s projects in the western South China Sea reported 50.2bn ft³ production of natural gas in the first half of 2017, a 4.8% increase from the same period last year.
But importing liquefied natural gas for China’s industrial growth is clearly easier and more stable than leaving necessary supply to the odds of striking gas offshore. In 2016, according to Cnooc, the success rate of independent exploration wells in offshore China was 52-69% and 115 exploration wells were drilled.
Nonetheless, domestic production remains robust. Major domestic gas producing projects include the deepwater Liwan Gas project which produces from the Liwan 3-1 and Liuhua 34-2 fields. The produced gas is piped to the Gaolan Gas terminal. Another is the Penglai liquids and oil project.
Small Oil and Gas Independents Developing China’s offshore Resources
China recently completed its 2017 new permit licensing round, offering 22 blocks, including some in the Pearl River Mouth Basin and the Beibu Gulf. In recent years, there has been an increased number of small independents operating blocks offshore China. Small independents include ROC Oil (now part of Brightoil), Empyrean Energy, Primeline Energy, Smart Oil and most recently SK Energy of Korea, which was awarded Block 17/08 in September 2017.
And Empyrean Energy has started 3-D seismic work on Block 29/11 to derisk prospects derived from the Liuhua 16-2 oil discovery, completed in mid-2017. Canadian Primeline’s producing Lishui gas fields offshore China are feeding the Zhejiang Gas Grid – possibly the first successful foreign investment to directly supply gas to a regional grid. Nonetheless, a payment/gas supply dispute did happen, which shows how such regional gas arrangements continue to face challenges.
Developing Infrastructure key to China’s domestic clean gas
According to an article by International Energy Agency in October 2017, while international gas markets are well supplied, the transformation of natural gas markets from regional systems to more globalised and interdependent markets is critical to ensuring gas supply reliability. It is clear that regional systems play a significant role in China’s gas economy. In other words, besides increasing gas production, China’s domestic gas sector is incomplete without the development of infrastructure. Billions of investment are slated for coal-to-gas transformation in second and third tier cities in China for use in industrial parks, commercial offices, logistics bases etc. Developing domestic gas resources in China is in many ways synonymous with the coal-to-gas phenomenon. Each yuan spent on China’s domestic gas distribution networks is also a yuan spent on transitioning China’s energy mix from coal to gas.
For example, China LNG, a private LNG transport contractor, announced several multi-billion LNG infrastructure deals, which will be financed by debt: a RMB 5bn bond to be jointly issued with a state-owned enterprise. China LNG announced in June 2017 the southeast Hubei LNG peak shaving centre and township clean energy Project which is a RMB 1.26bn project.
The first phase of investment includes building an LNG storage facility of 10,000 m³; 15 standardised industrial gasification stations; and the purchase of 50 LNG carrier vehicles. In particular, Phase Two, worth RMB 1.012bn, will go into coal-to-gas clean energy transformation for 50 townships and 10 tourist attractions by adding new LNG gas and refilling stations.
More recently, China LNG has a RMB 3.5bn plan for the Jiangyin-Changjiang Port Area coal-to-gas project which also includes building an LNG vessel terminal; storage tanks; an LNG tanker logistics base; distribution network; and a refuelling station. China LNG believes the Jiangyin investment will assist in the Group’s LNG logistics and trading integration development in eastern China and is expected to be put to operation within five years.Jiangyin is also near two LNG receiving terminals in Rudong and Qidong, with a third at Binhai to be completed in 2019, with an annual coal-to-gas target in the area up to 20mn mt.
This case study also reflects the SOE-smaller private firm dynamic which contributes to the market-oriented development of regional systems to ensure better gas distribution and efficiency. Debt financing, in principle, also gives the impression of a market-efficient allocation of financing, and in this case makes the dollar yuan spent on coal-to-gas transformation worthwhile for China.
By 2020 – infrastructure statistics will be good
According to the BP Statisticial Review 2017 for China, the percentage of coal in the country’s energy mix declined to 62% in 2016, compared with 64% in 2015. China’s coal demand also declined 1.6% while natural gas grew 7.7%. Compared to the previous year, coal production fell 7.9% while gas production grew 1.4% in 2016. Clearly, there is much opportunity for coal-to-gas transformation in China and infrastructure development will be part of the growth picture.
A staff reporter