Bloomberg News

China to Open New Shale Areas to Tap Reserves Exceeding U.S.

July 06, 2011

(Adds recoverable global shale reserves in sixth paragraph.)

July 6 (Bloomberg) -- China, estimated to hold more gas trapped in shale than the U.S., will open new areas to exploration as PetroChina Co.’s parent and Cnooc Ltd. seek drilling technology through partnerships and acquisitions.

The government aims to sign contracts with Chinese explorers this month to develop two blocks offered in the country’s first auction, and a second sale is planned later this year, Zhang Dawei, deputy director of oil and gas strategy research at the Ministry of Land and Resources, said in a telephone interview from Beijing yesterday.

China National Petroleum Corp., PetroChina’s parent, agreed in June to form a venture with Royal Dutch Shell Plc to improve its drilling efficiency after taking 11 months to complete the country’s first shale well. Baker Hughes Inc., the world’s third-largest oilfield services provider, says it has helped U.S. shale developers to cut drilling time to about 16 days a well.

“What they’re doing now is trying to assess the reserves underground and see how feasible it is to extract them,” Adam Wang, a global gas markets researcher at Cambridge Energy Research Associates, said in a June 29 interview in Beijing. “I don’t think China will be able to massively start producing shale gas until after 2020.”

Chinese shale may hold 1,275 trillion cubic feet of gas, or 12 times the country’s conventional natural gas deposits, the U.S. Energy Information Administration said in April. China’s “technically recoverable” reserves are almost 50 percent more than the 862 trillion cubic feet held by the U.S., the EIA said.

Production Forecast

The two countries account for 32 percent of the world’s recoverable shale reserves of 6,622 trillion cubic feet, according to EIA data.

Annual shale-gas output in China may reach 20 billion cubic meters (706 billion cubic feet) by 2020, Pan Jiping, a researcher at the land ministry, said in a June 30 interview in Beijing. That’s less than 15 percent of U.S. production in 2010, EIA data show. China currently doesn’t produce any shale gas.

Overseas explorers, barred from bidding in Chinese auctions of shale areas, are in discussions to forge local ventures. Chevron Corp. and BP Plc are in talks with China Petrochemical Corp. and its unit China Petroleum & Chemical Corp. Norway’s Statoil ASA is in negotiations to buy stakes in shale-gas assets in China. Shell is currently exploring the Jinqiu block in southwestern Sichuan province with CNPC.

Foreign companies will likely continue to be excluded from the second auction planned for later this year, the land ministry’s Zhang said, without giving a schedule for the sale.

Overseas Acquisitions

Chinese companies have invested in overseas ventures to gain access to technology for drilling horizontal wells in shale formations and to extract the fuel through hydraulic fracturing, which uses water, sand and chemicals injected under high pressure to break dense rock to release the gas trapped within.

Cnooc agreed in February to buy a 33.3 percent stake in Chesapeake Energy Corp.’s Niobrara shale project in Colorado and Wyoming for $570 million, after paying $1.08 billion last year for one-third of a Chesapeake shale venture in Texas.

China offered domestic explorers four areas last month in the country’s first auction of shale blocks. Contracts will be signed for the Nanchuan and Xiushan blocks in southwest China that each attracted at least three bidders, the land ministry’s Zhang said yesterday.

Nine bids were received from companies including PetroChina, China Petroleum & Chemical Corp., Shaanxi Yanchang Petroleum Group Co., China United Coalbed Methane Co. and Henan Provincial Coal Seam Gas Development and Utilization Co., the ministry said June 29.

Gas Demand

With domestic shale gas production yet to start, Chinese energy companies are ramping up extraction of conventional deposits and contracting liquefied natural gas supplies from Australia to help meet the government’s goal of doubling the use of gas to 8 percent of energy demand by 2015.

The world’s biggest energy consuming nation imported 11.4 billion cubic meters of gas in the first five months, almost doubling from a year earlier, the National Development and Reform Commission said June 13. Domestic output rose 6.7 percent to 43.2 billion cubic meters in the same period.

China may increase the number of LNG receiving terminals on its eastern coast to 16 by 2015 from five currently, Song Shaoguang, vice general manager of China Huanqiu Contracting & Engineering Corp., a unit of CNPC, said June 29.

Chinese LNG Purchases

China Petrochemical Corp. agreed in April to buy liquefied natural gas over two decades from a project planned by ConocoPhillips and Origin Energy Ltd. The state-owned parent of China Petroleum & Chemical also agreed to purchase a 15 percent stake in the Australian venture for $1.5 billion.

China National Offshore Oil Corp., Cnooc’s parent, agreed last year to buy the fuel from BG Group Plc’s LNG development in Queensland state. PetroChina signed a 2009 pact with Exxon Mobil Corp. to buy the gas from the Gorgon venture led by Chevron. Arrow Energy Ltd., acquired last year by PetroChina and Shell, is planning another LNG project on Queensland’s central coast.

Chinese gas demand may grow more than 20 percent annually in the next five years, and the country will rely on LNG imports in the near term, said Thomas Grieder, an Asia-Pacific energy analyst at IHS Global Insight based in Geneva. Plans to develop domestic shale-gas reserves are unlikely to have an impact on Australian LNG suppliers over the next decade, he said.

--Wang Ying, Winnie Zhu and Paul Gordon. With assistance from James Paton in Sydney. Editors: Ryan Woo, Amit Prakash.

To contact the reporters on this story: Ying Wang in Beijing at ywang30@bloomberg.net; Winnie Zhu in Shanghai at wzhu4@bloomberg.net; Paul Gordon in Hong Kong at pgordon6@bloomberg.net

To contact the editors responsible for this story: Amit Prakash at aprakash1@bloomberg.net; Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net.


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