China’s Shale Gas Development Outlook and Challenges

Developing and using shale gas could alleviate fossil fuel shortfalls in China, enhance that nation’s energy security, and contribute to economic and social development. Though the government has plans to utilize its buried shale resources, significant barriers to that plan remain.

Thanks to sustained and rapid development of China’s economy, demand for natural gas has been increasing. From 2000 to 2010, China’s demand for natural gas increased from 24.7 billion cubic meters (bcm) to 107.2 bcm; the average growth rate was about 16%. Furthermore, by 2009, natural gas demand exceeded supply in the Chinese market. China’s conventional natural gas production exceeded 100 bcm for the first time and reached 102 bcm in 2011, but the growth rate of yields was only 8.45%—lower than the average of 13.07% in the past decade.

Additionally, China’s dependence upon traditional energy imports is increasing yearly. Dependence upon foreign oil reached 53.8% in 2011, and net imports of coal were about 146 million tons in 2010, with year-on-year growth of more than 41%. Natural gas imports have been steadily increasing (Figure 1) as Chinese natural gas demand has been growing faster than that of coal and petroleum.

PWR_010114_ChinaShale_Fig1
1. Chinese natural gas imports are increasing. Source: General Administration of Customs of the People’s Republic of China

China’s high degree of dependence upon traditional energy imports is becoming a serious threat to the country’s energy security. Oil can be purchased from the international market; however, natural gas imports are limited by the fact that regional distribution is mainly by pipelines, which are limited in adjacent countries.

It is predicted that China’s natural gas consumption will maintain an annual growth rate of 25% in the next five years and that demand will reach 170 bcm to 210 bcm in 2015. However, it is also estimated that natural gas production will be only 140 bcm in 2015, with a growth rate of only 15%, which is far below that of consumption increases. The gap between supply and demand for natural gas in China will continue to expand in 2015, reaching 50 bcm.

In light of current environmental pressure, the high degree of dependence on foreign oil and gas, prominent nuclear safety concerns, and renewable energy grid integration issues (see “A Plan for Optimizing Technologies to Support Variable Renewable Generation in China” in the December 2013 issue of POWER), it is of great significance for China’s energy security to accelerate the development and utilization of shale gas.

China’s Shale Gas Resource Potential

“Evaluating shale gas resource potential and defining favorable exploration targets in key areas,” as enacted by the Ministry of Land and Resources, finds that the resource potential of China’s land shale gas is 134.42 trillion cubic meters (tcm) and the recoverable resource potential is 25.08 tcm (excluding Qinghai-Tibet district). The area evaluated where shale gas has been found is about 88 square kilometers (km), with geological resources of 93.01 tcm and recoverable resources of 15.95 tcm. The U.S. Energy Information Administration (EIA) has released a report saying that China’s shale gas resource is as high as 1.275 quadrillion cubic feet (36 tcm), ranking first in the world (Table 1). These numbers differ from others in Table 1, but all are estimates and all suggest abundant shale gas resources.

PWR_010114_ChinaShale_Table1
Table 1. Estimates of China’s shale gas resource..

China has abundant, widely distributed organic shale. Offshore, marine rocks have been developed in South China, North China, and the Tarim Basin in Xinjiang. The resource potential of continental rocks with geological conditions of shale gas reservoirs is large. Continental shale gas is mainly found in North China, the Junggar Basin, the Turpan-Hami Basin, Ordos Basin, Bohai Bay Basin, and Songliao Basin. The three marine shale basins are southern Paleozoic marine shale, North China lower Paleozoic shale, and Tarim Basin Cambrian/Ordovician Paleozoic shale.

The best areas for shale geological conditions are Sichuan Basin, Paleozoic systems in Ordos Basin, the Middle and Lower Yangzi Platform regions, and North China Basin; better areas are Junggar, Songliao and Turpan-Kumul Basin; poor areas are Qaidam and Liaohe Basin. South China, North China, Northwest China, and the Qinghai-Tibet Plateau account for 46.80%, 8.90%, 43.00%, and 1.30% respectively of total recoverable shale gas resources (Figure 2), while Paleozoic, Mesozoic, and Cenozoic formations account for 66.70%, 26.70%, and 6.60% of total shale gas.

PWR_010114_ChinaShale_Fig2
2. Regional distribution of China’s shale gas. Source: Research Institute of Exploration and Development of China Petroleum

Status of Shale Gas Exploration

Shale gas resources show great potential in China, but exploration and development of the unconventional gas is still at its exploratory stage. As research continues, China’s shale gas exploration is making considerable progress, based on the successful commercial experiences of America’s shale gas development. (See Figure 3 in the web version of this story at powermag.com for details of development stages from 2000 to present.)

3. Chinese shale gas development history. Source: Government departments

3. Chinese shale gas development history. Source: Government departments

China has carried out shale gas drilling and hydraulic fracturing tests in Sichuan, Ordos, Bohai Bay, Qinshui Biyang Basin, Zhaotong in Yunnan Province, and Guizhou Province as well as South and Tongren regions. The total drilled wells include 35 shale gas wells (including 5 horizontal wells), 14 hydraulic fracturing wells (including 2 horizontal wells), 11 industrial gas (oil) flow wells (including 1 horizontal well), of which 7 wells have a daily output greater than 10,000 cubic meters.

Policy Status

The Chinese government has announced a series of policies to speed up shale gas development, covering a range of issues, including:

  • Conducting the first round of shale gas exploration competitive bidding.
  • Designating shale as “independent minerals.”
  • Releasing shale gas geological resource reserves numbers.
  • Enacting the “Shale Gas 12th Five-Year Plan.”
  • Publishing the “Guidance Catalogue for Foreign Investment Industrial (2011 revision),” which defined the regulations for foreign cooperation and joint ventures for shale gas exploration and development.

Shale as an Independent Mineral. The Chinese government has strongly backed shale gas exploitation and exploration, making shale gas part of the country’s new energy strategy, and has approved shale gas as “independent mineral” to avoid monopoly control of the original oil and gas resources.

The National Energy Board “Shale Gas Development Plan (2011-2015)” aims to prove shale gas geological reserves are 1 tcm and recoverable reserves are 200 bcm. China’s annual output of shale gas is expected to total 6.5 bcm in 2015, up from zero today, and to be 100 bcm in 2020, according to the country’s shale gas development plan for 2011–2015. In the 12th Five Year Plan period, in order to support shale gas exploration, the Chinese National Energy Administration will promote the setting up of special shale gas funds and will study price mechanisms and related financial policy.

Opening Investment to Private Capital. In late June 2011, China conducted the first round of shale gas exploration competitive bidding and invited six state-owned enterprises to participate in bidding for four blocks of mineral exploration rights (in Chongqing municipality and Guizhou and Hunan provinces). Foreign companies and private domestic companies were excluded from the first auction. Sinopec and Henan Coal-Bed Methane Co. were the successful bidders.

In order to develop shale gas resources, China held its second shale gas auction in December 2011. Although state-owned companies were still major bidders, private domestic companies and foreign companies were also allowed to participate. This is an important attempt to reform management of mining rights of oil and gas resources, which will help to encourage private enterprises to invest in shale gas exploitation.

Price Policy. China’s “Shale Gas Development Plan (2011–2015)” has pointed out that shale gas is different from any conventional natural gas that executes market pricing. China’s current natural gas pricing mechanism can be summarized as a cost-plus pricing method under state regulation. The price of natural gas is divided into four links: the ex-factory price, pipeline fees, the urban gate station price, and the end-user price.

Pricing is determined mainly by government departments according to the production and supply cost plus a reasonable profit. Guangdong and Guangxi Province took the lead in piloting the natural gas price-forming mechanism on Dec. 26, 2011. The pricing of shale gas, coal bed methane (CBM), coal gasification, and unconventional natural gas will follow a market regulation mechanism, which also reflects the government’s attitude of encouraging the exploitation of unconventional natural gas.

Shale Gas Subsidy Policy. In a notice jointly issued by the Ministry of Finance and the National Energy Administration that took effect Nov. 1, 2012, the central government promises to provide subsidies for shale gas mining enterprises. The standard of subsidy is set at 0.4 yuan per cubic meter for 2012–2015 and is to be adjusted based on the development of the shale gas industry. Two categories of shale gas can enjoy subsidies: shale gas resources that have been exploited and utilized and enterprises that have installed metering equipment that can provide accurate data on the amount of shale gas exploited and utilized. That means companies bidding for shale gas exploitation rights that have not yet started shale gas development or utilization are excluded.

Technical Status

China has a foundation of technical equipment for shale gas exploration and development because horizontal wells and fracturing techniques have application in the traditional oil and gas industry. China has comparatively mature technology in manufacturing of drill, fracturing truck group, downhole tools, and so on. But the key technologies of horizontal drilling and hydraulic fracturing are immature.

First, China is lacking a whole set of technologies for horizontal drilling, including rotary steerable technology, logging while drilling technology, simulation software, analysis software, monitoring tools, and more. Second, it is inexperienced with these newer approaches. Take drilling for example: China has been drilling vertical wells for a long time, but only in recent years has it gradually shifted to the use of horizontal well technology to develop natural gas. Until October 2011 the total number of CBM drilling wells was more than 7,230, of which only about 170 were horizontal wells, with most of those drilled after 2009 (Figure 4).

PWR_010114_ChinaShale_Fig3
4. China’s shale gas reservoir drilling (as of October 2011). Source: Natural Gas Industry, Societé Generale Securities Institute

 

Major Challenges for Shale Gas Development in China

China’s efforts to develop its shale gas industry may face various obstacles, several of which are outlined below.

Resource Exploration Problems. Investigation and exploration of China’s shale gas resources is still in its infancy. Exploration is very difficult in China because the shale plate is complex and the available area for exploration is relatively fragmented. The main problems are that:

  • Investment in shale gas geological exploration is inadequate. Total investment in survey evaluation and exploration of shale gas is less than 7 billion yuan, compared with about 660 billion yuan for conventional oil and gas exploration.
  • China granted special access regulation of business exploration for oil and gas, which is basically controlled by the major oil and gas companies, which makes it difficult for private capital to get involved.
  • Geological data regarding shale gas could not be shared within the industry.

Policy Problems. Shale gas, involving faster development and higher investment risk, is an unconventional low-grade natural gas resource that needs positive and effective policies to ensure scientific and robust development. Nevertheless, China lacks a law and policy system to encourage development of unconventional oil and gas resources, including shale gas. Although shale gas has been classified as independent minerals, specific operational policies for the industry have yet to be resolved, such as the management of mining rights, market access threshold, and standards.

Technical Problems. Technical problems are the major factors hindering development of China’s shale gas. The shale gas is difficult to develop because of its ultra-low permeability and depth (Cambrian shale buried depth of 2,000 to 3,500 meters), which requires more advanced technology.

After several years of research and technical preparation, China has achieved some initial technology development, but not enough to meet the needs of shale gas exploration and development. Key technologies that are lacking include shale gas resource evaluation, shale-containing gas analysis test, horizontal well drilling completion technology, and long-distance stage-fracturing, which severely restricts exploration and development.

China also lags in technology for long-range multi-branch horizontal wells and super-tight reservoir stage fracturing reform. Additionally, the fracture fluid system is not built to effectively protect the shale reservoir and ensure minimal damage because the filtrate of different fracturing fluid systems can harm the shale reservoir to different degrees.

Additionally, some of the technical standards for existing natural gas exploration and development are not suited to shale gas. Shale gas does not contain hydrogen sulfide and other toxic components, and only via fracturing does it produce gas; in this sense, shale gas is artificial gas reservoirs. Nevertheless, the regulations regarding Habitat Safe Distance and Drilling Fluid Density were included in “Drilling Well Control Technical Specification” (SY/T6426-2005) and are too large for shale gas wells, which is not conducive to lower operating costs.

Furthermore, because it involves an unconventional natural gas, exploration and development of shale gas is much different than the description in the standard of “Oil and natural gas resource/reserve classification” (GB/T19492-2004), and its reserves could not be calculated in accordance with the existing “Oil and gas reserves calculation specifications” (DZ/T0217-2005).

Insufficient Pipeline Infrastructure. Shale gas must be transported mainly by pipeline, and China’s domestic natural gas pipeline network has been constantly improved. (See Table 2 in the web version of this article for existing and planned pipelines.) However, pipelines have become more important for importing foreign gas (at present there are three main import pipelines: the Central Asian natural gas pipeline, Myanmar gas pipeline, and the Russian natural gas pipeline), and additional pipeline infrastructure will be needed for domestic shale gas.

Table 2. Existing and planned gas pipelines in China. Source: Government departments

Table 2. Existing and planned gas pipelines in China. Source: Government departments

Potential shale gas regions are in mostly sparsely populated and remote areas; that creates a problem for transferring the mined gas to consumers. Infrastructure inadequacy has become a major obstacle to further shale gas developments. Despite recent developments, China’s pipeline network is unable to effectively reduce market risk faced by upstream enterprises. Currently, China has about 40,000 km of natural gas pipeline. The planned target is 100,000 km in 2015, but that is far from the U.S. pipeline total of 460,000 km.

Another problem is that the administrators of oil and gas pipelines have little incentive to transport third-party shale gas. China’s natural gas pipeline infrastructure was mainly controlled by Petro China and Sinopec, which led to highly concentrated control for mining, transportation, and sales. Petro China pipeline mileage accounts for more than 75% of the gas mainline, and Sinopec and CNOOC control less than 20%, which results in a serious monopoly of gas resources and gas pipelines. In case of tight gas transmission lines, if the Chinese government does not create complementary measures or encourage pipeline construction or force open the pipeline, shale gas development will face a huge cost to rebuild the infrastructure. Under the existing system, the party controlling the pipeline has no incentive to transport shale gas.

A Way Forward

We suggest several strategies for accelerating shale gas development in China.

Strengthen the Strategic Exploration of Shale Gas Resources. More data about potential shale gas resources, where they are distributed, and their geological conditions are needed to enable discovering development areas with organic-rich shale and predicting the potential distribution of shale gas resource.

Shale gas resources pilot test areas of strategic investigation, exploration, and development should be established. Government should establish a shale gas geological survey data integration system and form survey research for this series. It should also build talent teams for shale gas survey, exploration, and exploitation and develop a geological data-sharing system and a social service system. The government should also launch shale gas geological theory research and international communication and cooperation programs.

Create Policies Encouraging the Development of Shale Gas. As an unconventional natural gas resource, shale gas needs government policy support because of high exploration and development costs, a long investment recovery period, and difficulty in realizing short-term economic benefits.

Policies are needed to encourage strategic survey and exploration and development of shale gas resources, as has been the case in the U.S. and other countries. The national financial sector should increase investment in a strategic survey of shale gas resources and encourage private investment in shale gas.

In addition, various favorable tax and fee policies should be formulated similar to the domestic development of CBM to promote shale gas development. At the same time, government should increase subsidies for exploitation of shale gas and launch preferential policies for key technology research, development, and promotions.

Improve Key Technical Abilities. Investment in science and technology should be increased to promote technological innovation. We suggest organizing advanced technological forces to carry out key technology research on shale gas exploration and development and to encourage enterprises to develop, promote, and use new technologies and processes that can improve the efficiency of shale gas development. Additionally, the techniques of reservoir evaluation, perforating optimization, horizontal wells, and fracturing should be introduced and improved. Formulation of technical standards and specifications of shale gas should also be accelerated.

Accelerate Pipeline Network Construction. We recommend that the government develop comprehensive plans for and build a nationwide and regional natural gas pipeline network. Both more miles of natural gas pipelines are needed and an appropriate proportion of trunk pipelines and distribution pipelines. The Chinese government also should strengthen regulation of its pipeline network. For example, a nondiscriminatory access policy should be rolled out if it wants to decrease transportation costs for shale gas.

In order to meet the needs of the developing shale gas sector, construction of pipelines should speed up.

Another need is equitable entrance mechanisms for the natural gas pipeline network and timely mandatory introduction of third-party access provisions.

Construction of small liquefied natural gas and compressed natural gas facilities will also be needed, especially for development areas farther from the natural gas pipeline network, to minimize transportation costs.

As shale gas development advances, construction of export pipelines may be needed.

Shale Gas Is Nationally Important

China needs to speed up legislation concerning the management of shale gas resources, establish technological standards for shale gas development, introduce competitive mechanisms, improve foreign cooperation, strengthen supervision, and maintain an orderly and healthy level of shale gas exploration and development.

The Shale Gas Development Plan (2011–2015) issued by the National Energy Board identified shale gas development goals:

  • Basically complete the investigation and evaluation of shale gas resource potential, understand the distribution of shale gas resources, and optimize 30 to 50 prospective shale gas areas and 50 to 80 favorable target areas.
  • Mostly complete the national shale gas resource potential survey and evaluation in 2015, exploring shale gas geological reserves of 1 trillion cubic meters, recoverable reserves of 200 bcm, and achieving an annual output of 6.5 bcm.
  • Establish geological survey techniques and resource assessment technical approaches for shale gas that are suitable for geological conditions in China as well as key technologies for shale gas exploration and development and ancillary equipment.

Commercial development and utilization of shale gas in China can be divided into three stages:

  • First stage—before 2015: pilot testing and developing key technologies.
  • Second stage—2015 to 2020: focusing on the development of marine shale gas at scale in southern China and recognizing a breakthrough in the industrial development of continental shale gas and realizing its scale development and utilization. Shale gas production is expected to reach 20 bcm in 2020.
  • Third stage—after 2020: forming supporting technologies and effective management systems and mechanisms for shale gas exploration and development suitable for the characteristics of China’s unconventional gas. The goal is to make shale gas a new force to support rapid development of China’s natural gas industry within 10 to 20 years.

Although large-scale development of shale gas will take time, actively looking now for shale gas resources is imperative for national energy security reasons. As we look forward to the future, the development of China’s shale gas has broad prospects.

The authors would like to sincerely thank Wang Liang for guidance with the English writing.

Zeng Ming, Liu Ximei, and Li Yulong, School of Economics and Management, North China Electric Power University, Beijing, China.