As China looks for way to meet more of its natural gas demand domestically, it has looked to improving the economics of its own shale gas development. While China is one of four countries currently producing commercial volumes of shale gas, it has not been as economical as shale development in the U.S. Despite this, there have been more than 700 shale gas wells drilled in China, reaching production levels of 0.38 Bcf/d, according to data from the Energy Information Administration.
As Chinese companies gain experience producing from shale, the cost of shale gas drilling has declined. By mid-2015, the cost of drilling a horizontal well in shale formations in the Sichuan Basin was between $11.3 million and $12.9 million per well, according to China National Petroleum Corporation’s Economics and Technology Research Institute. This range was a 23% reduction in the cost of a shale gas well compared with the level in 2013 reports from Sinopec (ticker: SNP).
China has invested heavily in joint ventures in U.S. shale plays—China’s financial involvement represents 20% of total foreign investment in U.S. shale plays. This investment likely has provided China with valuable expertise that can be applied to its own domestic production, helping to lower well development costs.
Cooperation with companies in the U.S. has been a key facet of Chinese shale development, with the fledgling industry in China facing a challenging geology. Halliburton (ticker: HAL) and FTS International, a private Houston-based well completion company, have entered into joint ventures with Chinese companies to supply technologies to help lower well costs, water use and drilling footprints, reports the Houston Chronicle.
China’s technically recoverable shale gas reserves total 1,115 Tcf, Much of that is locked in basins with complex geology, far away from water supplies necessary for hydraulic fracturing, or near populous cities. For comparison, the EIA estimates that proved natural gas reserves in the U.S. totaled 354 Tcf in 2013.
OilService companies like Halliburton are sending technology to China like high pressure pumps that use less water, and multi-well drilling pads that help conserve space when reserves are located near populated areas.
A two-way street
While China is learning to lower the cost of well completions, companies like HAL and FTS are making inroads into the world’s largest energy demand center. Halliburton said it expects Q4 profits to reach 20% growth in the Eastern Hemisphere. While China might only represent a small portion of the company’s $5 billion overall business in the Middle East and Asia, it is not insignificant.
“This joint venture in China is an important first step that can help substantially expand FTSI’s overall business and drive significant financial growth,” FTS International spokeswoman Pam Percival said.
Developing the Sichuan Basin
Decreasing well costs and increasing experience in developing shale gas have been supplemented with continued government investment in the development of shale gas. In 2012, to encourage the exploration of shale gas, the Chinese government established a four-year, $1.80 per million British thermal units subsidies program for any Chinese company reaching commercial production of shale gas. In mid-2015, these subsidies were extended to 2020, but at a lower rate.
While several international companies are actively working to develop shale gas in China, much of the effort has been led by Sinopec and PetroChina, two of China’s national oil companies. Initial shale gas development has been focused on the Longmaxi formation in the Sichuan Basin, which is estimated to hold technically recoverable volumes of 287 Tcf. According to MLR, Sinopec and PetroChina are on schedule to reach 0.6 Bcf/d of shale gas production by the end of 2015. Although still a small fraction of China’s overall production, estimated at 13.0 Bcf/d in 2014, increasing shale gas output could eventually help to meet growing demand for natural gas in China and to limit growth in the country’s natural gas imports.
China has also looked to other sources of natural gas to help increase its domestic supply. China has looked to coalbed methane (CBM) to help meet its natural gas demand, but it has met with limited success.
Over the past 25 years, China has attempted to develop its substantial CBM resources, estimated by China’s Ministry of Land and Resources (MLR) at more than 1,000 trillion cubic feet (Tcf). Currently, there are more than 20,000 wells producing a total of 0.36 billion cubic feet per day (Bcf/d) of CBM in China. However, CBM well productivity in China is significantly lower than in countries such as Australia and the United States. CBM development in China has focused on the Ordos and Qinshui Basins of Shanxi Province. Although these two basins are considered to have China’s best geologic conditions, they still face significant geologic challenges (low permeability, under-saturation) that reduce well productivity, according to the EIA.