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Wood Mackenzie: China shale gas production to nearly double in 2020

Shale gas in China has seen significant progress over the last decade, growing to nearly 600 wells and 9 billion cu m (bcm) of production last year. In its latest analysis, Wood Mackenzie projects Chinese shale gas production to almost double to 17 bcm in 2020.

Currently in production are Sinopec‘s Fuling and PetroChina‘s Changning-Weiyuan and Zhaotong projects, which sit in the mountainous terrain of the Sichuan Basin. Nearly 700 new wells will come onstream between 2018 and 2020 from the three projects combined, with a total capital investment of $5.5 billion.

Despite commendable achievements in domestic shale, China will still miss its 2020 30-bcm production target, announced in its 13th energy sector five-year plan, by a considerable margin.

“China is eager to materialize its shale gas potential to fuel its massive gasification initiative and support rising demand growth,” explained Dr Tingyun Yang, Consultant, Wood Mackenzie. “In order to meet the government’s 30-bcm target, up to 725 additional wells are needed by 2020 on top of the nearly 700 new wells. This will double the amount of investment needed in the base-case drilling plan. The required well number could be larger if well productivity degrades. This is a mammoth task for the Chinese national oil companies (NOCs).”

“The speed of shale development will impact global gas markets. Considering the impact of shale gas production on domestic demand, the 2020 13-bcm ‘gap’ will have to be filled by imports, in particular liquefied natural gas (LNG),” added Lynn-Yuqian Lin, Consultant, Wood Mackenzie. “We have already witnessed how China was able to leverage on flexible LNG to cope with record-high demand this recent winter season.”

“The good news for Chinese shale gas is well costs have gone down considerably – 40% for exploration wells compared to 2010 levels and 25% for commercial wells compared to 2014. Chinese NOCs are starting to get their shale game plan together,” said Dr Yang.

The US took more than three decades to finally realize its shale boom. Success was built on a combination of underlying factors, including competitive and open markets, active small players, developed infrastructure and easily available expertise. None of these hold true for China.

A comparison of plays and rocks reveals China’s uniqueness. Shale formations tend to be deeper, more tectonically fractured and often less-pressured than US plays. Greater depth requires deeper wells, leading to higher cost and more challenges in maintaining well integrity while drilling.

Above ground, most of China’s shale gas plays are located in mountainous terrain. Selecting viable wellsites is not as straightforward as in Texas, where the topography is far flatter. In China, operators have to first remove mountainous land to host wellsites, build their own infrastructure, and transport drilling crews and equipment across vast distances to the wellsites. High population density also makes drilling and hydraulic fracturing harder.

Looking at shale players, the majors took a run at China’s vast shale resources during the first few years of the decade, but all exited after lackluster results. Only BP now remains with two undeveloped shale production-sharing contracts.

The Chinese NOCs, however, have overcome these challenges by developing their own understanding of the unique geology, relying on their own service arms to get more experience and, more importantly, progress in completion techniques and technology.

They have adopted a pad-based drilling, fracturing and production process, which reduces the footprint of the wellsites on the mountains. This practice, combined with more indigenous technology and drilling and completion techniques – fracturing trucks, drillable bridge plugs and drilling trajectory control know-how, for example – have helped to save drilling time and reduce costs, while wells are becoming larger.

While Chinese shale well costs are still much higher compared with the US, (even 20% higher compared with a deeper and larger well in the Haynesville), a recent turnkey contract for drilling, cementing and completion of four Sichuan wells won by domestic oil services company Honghua Group could perhaps hint at a new chapter in Chinese shale. The contract would imply an all-in cost at $7 million to $-7.5 million per well, a further 20% drop in well cost compared with 2017, once pad construction, infrastructure and facilities costs are included.

“While we do not expect a Chinese shale gas boom anytime soon, the NOCs will no doubt continue to push on and innovate, driven by the need to secure and develop energy resources for strategic reasons,” concluded Dr Yang.

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