China Sets Shale Gas Goal

Production targets seen as unrealistic.
An analysis by Michael Lelyveld
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A gas station of PetroChina, the arm of state-owned China National Petroleum Corporation, in Chongqing, Sept. 5, 2011.
A gas station of PetroChina, the arm of state-owned China National Petroleum Corporation, in Chongqing, Sept. 5, 2011.

China has set extraordinarily high targets for domestic shale gas production as it seeks to limit consumption of high-polluting coal.

On March 17, a top National Energy Administration (NEA) official said China has set a goal of producing 6.5 billion cubic meters (229.4 billion
cubic feet) of gas per year from its untapped shale resources by the end of 2015.

Just five years later, annual output is expected to reach 100 billion cubic meters with the needed technological advances in exploration and recovery, said Zhang Yuqing, head of the NEA's oil and gas department, according to the official Xinhua news agency.

The 2015 and 2020 targets are remarkable because China has yet to produce any significant volume of shale gas, a resource trapped in shale
rock formations that can be extracted with new horizontal drilling and hydraulic fracturing technologies pioneered in the United States.


China has only started looking for shale gas after the Ministry of Land and Resources (MLR) held its first auction for exploration rights last June.

The country is trying to duplicate the successful development in the United States, where the drilling method known as "fracking" has transformed energy markets and led to lower gas and electricity prices.

U.S. shale gas reached the equivalent of 138 billion cubic meters, accounting for 23 percent of the country's gas production in 2010, according
to Department of Energy (DOE) data. But that growth took place over a decade or more.

From 2000 to 2006, U.S. shale output grew from just 0.39 trillion cubic feet (tcf) to one tcf, or some 28 billion cubic meters, an average annual rise of 18 percent, mostly from development of the Barnett Shale formation in north Texas.

Production took off after 2006 with fracking and horizontal drilling, reaching an average annual growth rate of 48 percent by 2010.

Higher targets

But China's targets are far higher, implying annual growth of 73 percent from 2015 to 2020, based on RFA calculations.

There are serious doubts whether growth, even in China, can be that fast.

"These figures are grossly over-inflated," said China energy expert Philip Andrews-Speed at the German Marshall Fund of the United States in
Washington. "The rate of growth of over 70 percent a year between 2015 and 2020 is over- ambitious."

Although China has shale resources, it faces a host of hurdles to high production in such a short time.

Andrews-Speed said the targets assume a rapid series of successes in exploration, development and infrastructure for bringing the gas to market from remote resource areas like Xinjiang.

"Principally, the problem is that it's very difficult to build a complete integrated supply chain from the gas fields to the end user at a
rate of 70 percent per year," he said in an interview.

China's fastest growth rate in conventional gas production took place between 2002 and 2008, and that was at 16 percent per year, Andrews-Speed said.

Last year, domestic gas output of 102.5 billion cubic meters rose at a moderate pace of 6.9 percent from 2010, the National Bureau of Statistics reported.


But shale gas has become a subject of intense interest and activity in China following widely-publicized reserve estimates.

In 2011, the DOE estimated China's technically recoverable shale gas resources at 1,275 tcf, nearly 48 percent more than the United States. In
March, the MLR cited a more conservative estimate of 25 trillion cubic meters (882 tcf).

But either figure suggests vast potential as China seeks more environmental alternatives to coal with overall energy consumption climbing
at seven percent last year.

In February, the PetroChina subsidiary of China National Petroleum Corp. (CNPC) agreed to buy 20 percent of a Canadian shale project from Royal Dutch Shell to gain drilling technology, the official English-language China Daily reported.

Last week, CNPC and Shell signed a production-sharing contract for shale development in the Fushun-Yongchuan block of China's Sichuan Basin, Oil & Gas Journal's website said.

The MLR planned to auction 25 more blocks in March for exploration in 10 provinces, China Daily reported.

Policy changes

The Ministry of Finance is also considering a series of policy changes to promote shale development including subsidies, lower licensing fees and import duty exemptions for needed technologies, according to Xinhua.

But even with all the promotion, the 2020 target seems outlandish.

"It's possible if you have perfect organization and you're very lucky with the technology, but I think the probability of it is so low, it's not
worth including in the plan," said Andrews-Speed.

One major problem may be available water supplies, which are needed for fracking operations.

China already suffers from serious water shortages in many areas. According to the Ministry of Water Resources, average per capita water
supplies are only 28 percent of the global average, Xinhua reported last week.

The reasons for announcing the shale targets remain a matter of speculation, but NEA officials have been debating production curbs on coal,
which provides over 70 percent of China's energy needs at enormous environmental cost.

Under the plan, coal output would be capped at 3.9 billion tons in 2015, compared with 3.5 billion last year, China Daily reported on March 22.

Raise production

But the limit hardly seems settled. Xinhua reported the next day that the NEA plans to raise production capacity in 2015 to 4.1 billion tons, or about four times the production in the United States.

Andrews-Speed believes that the inflated gas goal may be a way making other energy targets add up under five-year plans.

"My view is that it's bureaucratic over-exuberance," he said, suggesting the number may have been plugged in as a needed variable to meet
environmental goals.

Another possibility is that the high shale gas targets are meant to send a signal to exporters like Russia that China can be self-reliant in gas as its demand grows. Price talks between Russia and China have dragged on for six years.

"They may be sending out a message to potential sources of imports not to drive for too high a price because we have our own alternatives,"
Andrews-Speed said.





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