China’s Fracking Future
With crude oil prices hovering at just under US$100 a barrel juxtaposed to the steady decline in natural gas prices since 2011, it’s no wonder that the Chinese authorities have placed added importance on increasing the proportion of natural gas use in China’s energy mix to 10% by 2020.
One strategy is to import much more LNG from overseas suppliers through the building of a string of LNG terminals up and down China’s east and south coast. Currently, 5 terminals are up and running with another dozen being planned. But, by far the better strategy is to exploit the biggest technologically recoverable reserves of shale gas in the world. Interviewed last November, Chief of the US Energy Information Administration (EIA), Adam Siemenski remarked, “if the Chinese could do this, it would have enormous implications for them, and possibly for global LNG trade too”.
China’s Ministry of Land and Resources (MLR) conservatively estimates the country’s shale gas resources locked in six giant sedimentary basins across the country to be 24.8 trillion m3, slightly ahead of America but the EIA puts it at 35.7 trillion m3, or about 48% more than the US. The basins are: Songliao in the northeast, Ordos in Inner Mongolia, Bohai along the Bohai Sea, Sichuan to the southwest, and Tarim and Junggar in northwest Xinjiang Province. The Sichuan and Tarim basins are considered to be the most promising and early development has concentrated in the Sichuan Basin due in part to its location in densely populated Chongqing and parts of Sichuan Province.
BP’s latest Outlook 2030 study predicts that China is en route to becoming the most successful country outside of North America in developing shale gas by that date. But, industry analysts say that in the short and medium term, China is certain to fall short of its target of producing 6.5 billion m3 by the end of the 12th Five-Year Plan period (2015), making its target of 100 billion m3 by 2020 even harder to reach.
Even so, Qianye-1, Sinopec’s first exploratory well completed a year ago in partnership with Conoco and Chevron in Qianjiang District of Chongqing into Sichuan, yielded a significant amount of gas. PetroChina in association with Shell will also drill their own blocks in the region. Potentially, between 150 and 200 wells can be drilled in Chongqing over the next three years plus more in neighbouring Sichuan.
But, China’s shale gas ambitions face a number of obstacles above and below the ground. Hydraulic fracturing, the injection of water, sand and chemicals into the ground at high pressure to release trapped gas, requires vast amounts of water which is in short supply in many areas. This is particularly true of the Tarim Basin which is one of the most parched regions on earth and far away from centers of fuel consumption. Meanwhile, densely populated Sichuan/Chongqing face serious water shortages with China’s per capita water resources at only 28% of global averages.
In addition, China’s basins are still at the earliest stages of exploration and deposits are deep in the ground containing higher levels of kerogen and clay that make them less brittle for fracturing and keeping propped open. Interviewed by Yahoo’s Maktoob News, Chris Faulkner, founder and CEO of Breitling Oil and Gas, said typically, it takes 8 to 10 million gallons of water to drill a well in the US but because of its shale geology, it takes 10 to 13 million gallons in China. Water-intensive fracking would thus put a heavy burden on already-strained water supplies not to mention the possibility of contaminating clean drinking water for millions.
Not only are the Sichuan deposits deep at nearly 6 km but horizontal wells must be drilled to unlock commercially viable gas that would stretch drilling to 7 km or more. But, a Reuters report opined that none of the technical challenges are insurmountable and China has multitudes of engineers and its SOE oil and gas companies bundles of funds to throw at them.
The Sichuan Basin is already full of conventional gas fields and over 18,000 km of pipelines and its Qiongzhusi and Longmaxi shale gas formations actually lie on top of conventional ones, at depths similar to several shale fields in the US. According to the EIA, the two massive formations that have 200-300m thick organically rich layers, could each produce 9.52 to 9.8 trillion m3 of shale gas that together would be more than any other country save the US, Argentina and Russia.
China lacks certain technology, know-how and equipment for deep and horizontal fracking but its oil giants have spared no expense in North America to gain access to development expertise and state-of-the-art fracking and other drilling techniques and technologies. CNOOC’s successful takeover of Nexen is mainly about acquiring assets and also know-how which it hopes will help in lowering costs for wells that in China may cost up to US$30 million to develop compared to only $6 million in the US.