China’s shale gas
The outlook and opportunities for petrochemicals based on China’s development of shale gas
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Nexant has recently completed a detailed analysis of the current and developing status of China’s shale gas sector. The report has been tailored to explore potential opportunities and implications for downstream petrochemicals particularly associated with ethane. To date, the shale gas sector in China is in its infancy and, as a result, there is relatively limited data available in the public domain. This is especially true when compared to published information sources associated with the shale gas sector in North America. The North American shale industry is well established and in most cases shale resources have been mapped in great detail. In comparison, China’s shale industry is still very much in the early exploration phase, with information tightly held amongst a few organisations directly involved in oil and gas exploration.
China is the world’s most populous country and one of the leading consumers of global energy. The domestic economy has grown rapidly over the past 20 years, creating both a surge in demand for energy and a desire for securing future energy resources. Currently, the major part of China’s energy consumption is derived from domestic coal reserves. In 2014, coal accounted for approximately 67% of China’s total energy consumption. In comparison, oil consumption is relatively modest at around 18% (see Figure 1). Despite this, China is the world’s second largest consumer of oil behind the US and the world’s largest net oil importer. Total gas consumption in China today is relatively small compared to other energy sources and accounts for approximately 5% of total domestic energy consumption.
Future sources of energy supply in China are forecast to change over time as the government continues to drive increased self-sufficiency through the promotion of wider energy diversification. Additionally, due to growing environmental concerns such as air quality and global warming, there is a greater push to enact policies that diversify the energy mix in favour of cleaner burning fuels. Within this aspect of the energy sector, natural gas is forecast to become an increasingly important component of the overall energy mix. However, China only has modest reserves of conventional gas and therefore unconventional gas reserves are being actively targeted to meet the country’s energy objectives. Within this context, the country’s shale gas potential is therefore highly significant on two fronts:
• First and foremost, the potential presence of large quantities of indigenous gas could significantly boost the fuel’s share of the primary energy mix, assuming the gas can be extracted and transported economically.
• Secondly, shale gas production could displace (in the long term) or partially displace (short term) Chinese gas imports from LNG and neighbouring countries via pipelines.
The Chinese government was aiming to increase the natural gas share of total domestic energy consumption to around 8% by the end of 2015 and to 10% by end 2020. These increases are expected to substitute for domestic coal due to growing environmental concerns. To achieve these targets, the government has placed strong emphasis on developing its domestic shale gas reserves (see Figure 2).
Recent data suggest that total Chinese shale gas reserves are the highest in the world at approximately 31 tcm. This estimate has been derived from an assessment of seven major prospective shale basins distributed across the country. Despite its immense shale gas resources, China has only recently commenced shale gas production and actual production levels to date (initiated in 2012) are very small. However, based on current shale gas resource estimates and domestic natural gas demand there is significant potential for development over the long term.
Shale gas development in China has not attracted the same level of environmental concern that has developed in other regions of the world such as North America and Europe. This is partly because of the industry’s infancy, but also because China is still developing its economy.
Consequently, the Chinese government has not placed the same emphasis on environmental sustainability as have some of the world’s more economically mature countries. This attitude may change as the Chinese economy matures, but for now the achievement of economic objectives is the government’s number one priority. However, the nascent Chinese shale gas industry faces multiple challenges, which include:
• Land access Access to land surface for operations is particularly difficult in China as it is one of the most densely populated nations in the world. This will severely restrict shale gas operations, which require around 0.3 km² per well (average US well spacing used as proxy). The need for additional land required to construct water pits, gas processing and transport infrastructure, and roads further complicates matters.
• Complex topography If China aims to reach 50 billion cu m (1.8 tcf) of shale gas production by 2020, and maintain it for 10 years, at least 5100 sq km of land is required for drilling operations. This may not seem much compared to China’s vast area, but the problem becomes apparent when topography is taken into account. Only 1% of China’s land is in plains, while the rest is mostly plateaus, hills, and basins. However, plains are the only areas suitable for shale gas exploration and production operations. This presents another significant bottleneck for shale gas development.
• Low crude oil pricing Recent price lows in global crude oil markets have resulted in a dramatic U-turn in E&P spending globally. As a result, higher cost unconventional energy resources have become less attractive to energy companies and in many cases not economically viable. The current low oil price environment has led to a number of high profile foreign companies exiting China shale gas projects over the past 18 months. Despite this, China’s national oil companies remain highly committed to the sector and under pressure to meet government set production targets.
• Water constraints Typical water usage per shale gas well for fracking and other operations is 11 000 to 15000 cu m. To support 50 billion cu m (1.8 tcf) of shale gas production, an estimated average of 18 million cu m of fresh water annually would be required. Given that China’s estimated per capita annual renewable water availability is around 2080 cu m, this poses a significant challenge. The situation is exacerbated by the fact that several shale basins are in water-constrained provinces.
China’s shale resources
Total shale gas resources are largely concentrated in three principal basins: Sichuan, Tarim and Yangtze. Combined, these three basins hold an estimated 87% of total recoverable gas. The Sichuan basin alone accounts for 56% of the country’s total recoverable shale gas resources, and it is within this region that the majority of exploration and initial production is taking place. Initial shale gas exploration and production efforts under way are largely concentrated in the Sichuan Basin. However, there is also reasonable interest in exploration in Yangtze, Subei and Tarim regions. The remaining shale basins appear to offer lower prospects in the near term. This is largely due to technical challenges and infrastructure issues (see Figures 3 and 4).
Official government shale gas production targets are set by China’s National Energy Bureau as part of the 12th five-year plan and the shale gas development plan (2011-2015). However, in 2014 all shale gas production targets were revised down as initial progress in the sector was slower than expected. Previously, the government had set a target of around 60 billion cu m by 2020, but this number has now been revised down to 30 billion cu m. Based on reported progress, this production appears to be realistic. However, there are concerns that reported shale gas production numbers may also incorporate some conventional gas production.
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