China Starts in Path to Shale Gas Development

China Begins to Tap Its Shale Gas, Despite Daunting Technological, Environmental Hurdles

By JOEL KIRKLAND of ClimateWire in CHENGDU, China

 A convoy of white vans barreled down a dusty road three hours south of this provincial capital in late September. Lush valleys were drying out after another long and turbulent rainy season.

U.S. and Chinese government officials and brass from the nations' biggest oil and gas companies tailed their police escort deeper into Sichuan province. Truck traffic clogged the road, bisecting vegetable patches and rice paddies that seemed to disappear into the fog that morning. Around a final bend, the sunburst insignia on PetroChina's flag soared above the first horizontal natural gas well drilled in a Chinese shale basin.

The troupe of official visitors, dressed in red lab coats and hard hats, listened as a young PetroChina spokeswoman read from a sprawling billboard, in Chinese, then English: "Sichuan Basin, one of the earliest regions to discover and use natural gas in human history, is now becoming a hot spot for shale gas development," she boasted.

Shale gas is among the largest onshore energy prospects in China, and it is treated as such in Beijing and by local officials in central China and its sprawling Northwest. Unlocking trillions of cubic feet of gas buried in underground formations means heating more city apartments, generating more electricity from a resource other than coal, and feeding industrial plants hungry for energy.

But the government's quest to develop China's large shale gas deposits is in its earliest days. National oil companies and Beijing are moving cautiously. China is well aware of the environmental pitfalls that are raising doubts in the United States. There are geological differences that make the U.S. shale boom difficult to duplicate in China. Water for extracting gas is relatively abundant in Sichuan, but farmers in the nation's breadbasket need it more. Sichuan farms supply 7 percent of China's rice, wheat and other grains.

Tapping the homegrown shale, as China sees it, could buffer the economy from supply shocks if Russia or its gas-rich neighbors bordering the Caspian Sea restrict pipeline access. And, as it proved out in the United States, shale gas can be a formidable competitor for high-priced liquefied natural gas shipments sloshing around on the open seas.

Seeking an escape from foreign oil with U.S. help

"If the strategic goal is energy security and you're now 55 percent dependent on foreign crude, that undermines the goal of domestic energy security," said Damien Ma, a China analyst at Eurasia Group. "A lot of companies want to do more gas."

China's state-owned energy companies are captivated by the prospect of an onshore gas bonanza where there had never been one before, and they're not alone.

U.S.-based oil and gas giants Exxon Mobil Corp., Chevron Corp., ConocoPhillips, Anadarko Petroleum Co. and Halliburton Co. -- with the help of the U.S. government -- are delicately urging regulators in China to loosen restrictions on foreign gas field operators. The multinationals, confident that their expertise in cracking shale basins is worth something to China, are approaching with varying degrees of success the largest state-owned producers with offers to partner on projects.

So far, Royal Dutch Shell PLC is the only major Western producer to sign a broad partnership agreement to help PetroChina build wells. Offering few details, Exxon has said it is partnering with Sinopec to explore in the Sichuan Basin. BP PLC and Statoil are reportedly also in joint venture talks.

"It's way too early to really judge what the potential is and what's going to happen here in China. It's in its infancy," said Mark Pospisil, senior vice president of geology for XTO Energy Inc., speaking at an energy conference in Chengdu. XTO and Exxon merged in June 2010 to create the world's biggest shale gas producer.

"It's like George Mitchell drilling the first well in the Barnett [Texas shale deposit] in 1984 and trying to frack it," Pospisil said of China.

Two decades before Exxon's $30 billion bet placed shale gas squarely on the world map, Mitchell's Texas oil company pioneered horizontal drilling and hydraulic fracturing, a resource-intensive industrial process that drillers and their environmental critics shorten to "fracking."

Learning 'fracking' on the run

Producers inject millions of gallons of water, sand and chemicals at a high pressure into wells drilled some 8,000 to 10,000 feet deep and close to a mile in one direction. It fractures and "stimulates" the porous shale rock, tight gas or coal-bed methane deposits, coaxing gas to the surface.

It took Mitchell 20 years to cajole enough gas from the Barnett Shale field underneath eastern Texas to make it a big business. China wants to do the same thing in the giant 81,000-square-mile Sichuan Basin, only faster.

China's capacity to build energy infrastructure by injecting financial and regulatory support means that China could carve hundreds, if not thousands, of wells out of Sichuan's fertile countryside by 2020. In the next four years, PetroChina says it plans to build 220 gas wells in the same area as it built its first.

If China opens the spigot for shale gas developers, there are significant deposits in Inner Mongolia in the north and particularly in China's restive Western frontier, Xinjiang, which suffers from severe droughts, water shortages and a separatist movement.

A report last spring, commissioned by the U.S. Energy Information Administration (EIA), estimated that China holds 1,275 trillion cubic feet (tcf) of technically recoverable shale gas reserves, compared to 860 tcf of shale gas in the United States.

But drilling thousands of wells -- as wildcatters, small independent producers and oil giants did across Texas, Arkansas, Louisiana and Pennsylvania in the past decade -- will be a lot harder in China, sources emphasized during interviews with ClimateWire conducted in the United States and China.

"A year ago, we were saying that we expected the buildup of shale to be conservative and incremental," said Gavin Thompson, director of China gas research at Wood Mackenzie in Beijing. "Twelve months later, we haven't seen much progress."

Secretive environmental data

Exploration, seismic and environmental data out of China's shale fields are murky, either because the right information isn't being collected by regulators or because it's buried in closely held exploration and drilling reports. It's an industrywide concern underscored in the EIA report, drafted by Advanced Resources International (ARI), an Arlington, Va.-based research firm. "Reservoir quality remains uncertain, while in-country shale drilling and completion services are still nascent," the report says.

Analysts there predict it will take five to 10 years for production to reach "material levels," but include significant caveats to suggestions by PetroChina, Shell and others that a shale boom is on the horizon.

"We would give it a much bigger haircut because of the geological complexity," said Scott Stevens, a co-author of the ARI report who has worked on gas projects in China for 20 years.

At times, there is more than meets the eye. At a visit to the PetroChina site in Weiyuan, the site south of Chengdu in south-central China, a drilling pipe in the middle of a soaring rig spun slowly as officials observed what appeared to be an active drilling operation. Yet a progress report, viewed by a Halliburton employee days earlier, indicated engineers had been forced to stop operating after the drill head broke off a mile underground.

Shale gas in China could trump imported LNG or gas piped from Turkmenistan on price, said Western energy analysts, but not until China gets better at drilling wells, or hires outside help. It took PetroChina 11 months to complete its first horizontal well last spring. "That's time and money," Stevens said.

"It looks so easy in the U.S., but we have independents," he added, referring to the band of small and mid-sized U.S. producers that were nimble enough to spend a decade developing the shale fields through trial and error.

"We also have private mineral rights. You've got thousands of farmers in Pennsylvania who are getting royalties," Stevens noted. "Overseas, including in China, the government owns the mineral rights. It takes years to get contracts; they're not giving contracts to foreigners."

During the 1990s, Exxon, Chevron, Texaco and Phillips all but abandoned exploration projects in the oil and gas-rich Tarim Basin after China steered the best opportunities to its state-owned companies.

Haibing Ma, a China energy expert at Worldwatch Institute, said China is cracking open the door to more collaboration, however slowly.

In Chengdu last month, officials from China's Ministry of Land and Resources and National Energy Administration said the government might set up a regulatory system that treats shale gas differently from conventional oil and gas.

Legal access for outsiders remains unclear

For now, licenses to explore shale gas blocks are for domestic companies only. Last week, the government said a second auction will be held before the end of the year. The ease with which PetroChina, Sinopec or smaller explorers can bring on a foreign partner is still unclear.

"This is something we need to sort out," said Che Changbo, deputy director of oil and gas strategy at the Ministry of Land and Resources.

China demands more energy and produces more greenhouse gas emissions than any other nation. It remains tethered to coal for 70 percent of its electricity and imports oil to fuel its growing car fleet. Natural gas accounts for about 4 percent of China's energy use today, but, as it stands now, China plans to boost that to 10 percent by the end of the decade.

In the United States, the expansion of the onshore gas resource by advancing drilling technology and bringing to bear huge capital injections into the shale basins has helped accelerate the closure of coal-fired power plants.

While burning gas for power slashes smog-forming and cancer-causing pollutants and cuts carbon emissions in half, observers say China is not about to sideline its existing fleet of coal plants. China has built much of its fleet of modern coal-burning plants in the past five years.

Asia's powerhouse is slowing, as inflation, signs of trouble in China's massive housing stock, and the sustained economic downturn in the United States and Europe pinch. But its economy still expanded at a rate of 9.5 percent in the second quarter.

China is pursuing every resource it can to keep the economy humming. In the case of shale gas, it's about where the United States was in 2001: LNG terminals and international pipelines are being built, until there's greater certainty about shale gas.

"To meet the demand growth, China has a fairly limited number of options," said Thompson of Wood Mackenzie. "Either it continues to attract imported gas, alongside the development of domestic resources, or it sees demand growth flatten by the end of the decade."

Despite half a decade of negotiating and political tension, some analysts say China and Russia's Gazprom will eventually cut a long-term supply deal. But until then, and until shale gas becomes a reality, analysts expect China's national oil companies will import more LNG and negotiate contracts with gas suppliers in Qatar, Australia and Papua New Guinea.

The government has put off gas price reform as it tries to curb inflation. So in August, China offered its gas importers a rebate to narrow the gap between what they spend to buy LNG and what they sell gas for in the domestic market.

The rebate is meant to prod Sinopec, China National Petroleum Corp., which operates PetroChina, and China National Offshore Oil Corp. (CNOOC) to compete for LNG tankers during energy shortages and gain better access to an Asia-Pacific gas market dominated by demand in Japan and South Korea.

Jobs, food and water issues among 100M neighbors

Sichuan Basin, where PetroChina fracked its first well, is among the most heavily populated regions in the country. Nearly 100 million people live in Sichuan province and its neighboring megacity, Chongqing. The basin stretches into southern Yunnan and eastern Hubei provinces, and the Yangtze River drains into tributaries through the region, nourishing the land.

Industrial development is rapidly encroaching on the countryside where PetroChina is exploring for gas. Bringing factories, steel mills and decent-paying service jobs to areas closer to home for millions of migrant workers is part of China's "economic rebalancing."

As the convoy of American and Chinese oil industry officials pressed ahead along crowded two-lane roads last month, smoke belched from a steel plant cut into the leafy hills. An unfinished bridge stretched across a valley. A makeshift coal mine appeared, and a few miles up, a truck hauling a full bed of dirt had run off the road, tipping toward a ravine.

Farms are tucked ever more tightly into the landscape. China's staples are produced here -- one-tenth of its pork, and the grains and oils needed to feed 1.3 billion people. Water is abundant, but unevenly distributed across the region.

"Just pick up China's five-year plan and there are water issues all over it," said Guy Lewis, a managing director at the Gas Technology Institute, based outside of Chicago. "The way it plays out in China might be based on their choices of technology."

PetroChina plans to build at least 200 wells in this corner of the basin by 2015. It will create jobs. It will also squeeze the landscape and the people living there.

Few roads and pipelines are built to haul massive amounts of water, sand and drilling sludge in and out. Few rules exist for disposal of wastewater or use of local streams. To drill in this area's urbanizing countryside, alongside working farms, multiple wells will have to be built on a single drilling pad, according to industry sources, and water recycling will have to be the norm.

Ming Sung, the Beijing-based chief Asia-Pacific representative for the Clean Air Task Force, said in an interview that prime agricultural land and shale gas development can coexist.

"We have sufficient technology to ensure they coexist, but they have to do it right," said Sung, a chemical engineer who worked for Shell for 25 years.

With Thanks to ClimateWire     ClimateWire is published by Environment & Energy Publishing.

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