China Revs Up Shales

At a China Shale Oil symposium held in April, the premier of the State Council, Wen Jiabao, a trained geologist, said China had to “accelerate shale gas (exploration) and development.” That acceleration topped the list of objectives in his March 5 speech at the Politburo. And in mid-March, several state agencies—the National Development and Reform Commission, the Ministry of Finance, the Ministry of Land and Resources (MLR), and the National Agency of Energy—jointly published the first five-year plan for shale-gas development in China for 2011–2015.

Although no detailed rules have been enacted, late in 2011 the State Council approved changing the legal status of shale gas from a “natural resource” to an “independent mining resource.” The change exempts shale gas from the current restrictive regime for hydrocarbon exploration and production.

As of January 30, 2012, foreign investments in the exploration and development of shale gas and shale liquids now fall within the “encouraged” category. This allows foreign investors to set up joint ventures with their Chinese partners and enjoy certain administrative and tax benefits.

Although the MLR’s Dawei Zhang didn’t elaborate on specific policies, he said that “the fiscal regime to develop shale resources should be better than the one to develop coalbed methane.” This would imply a reduction or exemption of user charges for prospecting; exemption of customs duties for importing high-tech equipment needed for exploring; implementation of a degree of liberalization in the price of natural gas; fast-tracking the approval process for land-use rights qualification; and other benefits.

Dawei Zhang also listed the pros and cons of developing shale resources in China. Pros include solid government support; strong natural gas demand; availability of some exploration technology; desire on the part of major coal/power-generation companies to develop shale resources; and lower land and labor costs. Drawbacks are China’s geology, which is trickier than the U.S., with smaller basins; riskier drilling, to deeper depths and with fewer commercially viable wells; the need for advanced fracing technology; the need for smaller companies to develop technology, as investment is tied to larger players; and insufficient pipeline capacity.

China’s shales are divided into marine shales (60,000 to 90,000 square kilometers); terrestrial shales (20,000 to 25,000 square kilometers); and sea-land transitional shales (15,000 to 20,000 square kilometers). The MLR is apportioning the country into five areas and 41 districts. Current estimates suggest that seven provinces account for 70% of the shale resources. Onshore deposits of shale gas occur throughout the country, and 180 areas of shale gas have now been identified by the MLR for priority development.

The MLR has announced that a larger number of investors will be invited to participate in shale-gas development. Many large foreign oil companies are indeed willing to leverage their technology and know-how to gain access to Chinese shale-gas and oil markets and participate in the second round of bidding (involving 20 blocks in 10 regions), which should take place by the end of 2012. However, the Chinese government has not indicated whether foreign energy companies will be allowed to participate directly in this second round, and, if so, whether they will be allowed to hold majority ownership and/or act as operators.

Despite this possible opening to foreign oil companies, the biggest issue emerging from the conference was the lack of oil-service knowledge, technology and equipment. To frac one well usually requires that the regional oilfield companies operating under PetroChina and Sinopec pull equipment from all over the basin. Hence, it is rumored that Sinopec and PetroChina are looking to acquire a mid-sized oil service company with fracing experience and technology patents.

Midstream infrastructure will also be needed. But this constraint is considered secondary to producing the hydrocarbons. Finally, China will need to adjust its natural gas price, which is close to US$2 per MMBtu.

Despite these obstacles, observers expect China will develop its resources quickly, with help from the major integrateds.