China's Shale Output to Double by 2020: Wood Mac
Chinese shale gas production is expected to witness a significant increase in the next few years but will miss the target set in 13th energy sector five-year plan by a considerable margin, Wood Mackenzie said in a note published April 17.
WoodMac expects Chinese shale gas production to almost double from 2017 to reach 17bn m3 in 2020. At present the major producing fields are Sinopec's Fuling, and PetroChina's Changning-Weiyuan and Zhaotong projects, in the mountainous Sichuan Basin. Nearly 700 new wells will come onstream between 2018 and 2020 from these three projects, with a total capital investment of $5.5bn, WoodMac said. However, the 2020 output levels will be much lower than the government’s target of 30bn m³.
"China is eager to materialise its shale gas potential to fuel its massive gasification initiative and support rising demand growth," said WoodMac. "In order to meet the government's 30bn m3 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."
The projected gap in the target and actual shale gas production will have an impact on domestic demand which will need to be met by LNG imports.
"The speed of shale development will impact global gas markets. Considering the impact of shale gas production on domestic demand, the 2020 13bn m³/yr 'gap' will have to be filled by imports, in particular LNG," WoodMac said. "We have already witnessed how China was able to leverage on flexible LNG to cope with record-high demand this recent winter season."
Lower costs
One positive development for the Chinese shale gas industry is that well costs have been declining since the start of this decade. "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 WoodMac.
While Chinese shale well costs are still much higher compared to the US, (even 20% higher compared to 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, according to WoodMac.
The contract would imply an all-in cost at $7-7.5mn/well, a further 20% drop in well cost compared to 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," said WoodMac.
But challenges remain
It took the US almost three decades to fully realise its shale boom. This success was built on factors such as competitive and open markets, active small players, developed infrastructure and easily available expertise. According to WoodMac, none of these holds 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 in mountainous terrain.
Selecting viable well sites is not as straightforward as in Texas, where the topography is far flatter, WoodMac said. In China, operators must first remove mountainous land to host well sites, build their own infrastructure, and transport drilling crews and equipment across vast distances to the well sites. 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 lacklustre 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, most importantly, progress in completion techniques and technology.
They have adopted a pad-based drilling, fracturing and production process, which reduces the footprint of the well sites 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, said WoodMac.