Progress – and Challenges
After some critical commentary about the program‘s progress, numerous reports have issued in recent days, proclaiming and analyzing the dramatic success of the first “commercial” gas development from China’s potentially huge shale reserves (estimated to be the world’s largest). In brief, Sinopoc (CNPC) has been producing from 21 “demonstration” wells in one area, averaging 10 million cubic feet/day per well. This would account for about a third of China’s shale gas output, and under 0.5% of total consumption. The metrics, if true, put the country somewhat ahead of a modest 2015 target to produce 2-3% of domestic demand. Yet, as recently as 2012, even Sinopec believed that the 2015 targets were unattainable — by a factor of 3-4x. This while Chevron has expressed disappointment in their results from other basins.
Clearly, Sinopec and its vendors have made considerable progress on the production front. However, from a review of the press releases, well performance varies widely. For instance, half of the production from six wells cited came from a single well. One can presume that the Big One is profitable, while the other five might all be ‘under water,’ even in a subsidized environment. Other observations;
a) The resource is deep – roughly 15,000 feet — only the US’ Haynesville Shale (10,500-13,000) is even close, and most US shale zones are well under 10,000 feet.
b) Sinopec’s wells cost around $15 million each — double the best Haynesville wells (and 4x shallower US shales, on average), although, with time (and cheaper labor) this should improve. And those well costs don’t include much of the above-ground infrastructure required for broad distribution.
c) The specific basin (Sichun Province) is “water light.” Due to depth and complexity, most believe that each well will require 25-50% more water for fracking activities. So near to relatively populated areas, water issues, as well as the earthquake prone, mountainous topography, may be serious .
d) Most Haynesville production is barely profitable at $5 gas. China has implemented special tariffs (roughly $8/mcf) to encourage shale gas development, but this is viewed as the break-even price and, while about a third less expensive than imported LNG, is more expensive than piped gas from Turkmenistan.
The plan is to drill another 110 wells in the region over 2014-5. There is little doubt that Sinopec and others will make progress, although the 2020 goal (10x the 2015 target and 15% of domestic demand) seems a stretch, the Chinese Shale Gas Industry has several tailwinds – a low priority on returns, a generously subsidized price (so far), eager interest from international vendors (Schlumberger has acquired 20% of a local services firm, and both Halliburton and Baker Hughes are active), cheap labor, relatively liberal environmental regulation, and a health-related incentive to substitute domestic hydrocarbons for coal (power) and oil products (transportation).