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Global Oil & Gas: LNG will eventually face impacts from rising shale-gas output in China
Shale-gas development in China is likely to influence LNG imports but such an impact is limited at present and will then build up only gradually.
In the bigger picture, depending on the actual stage of shale gas development, China’s pipeline gas imports as well as overall gas supply will be affected as well, according to a report by the consultancy FACTS Global Energy.
Angles
“Imported LNG is another important leg of China’s future gas supply and demand. We see this issue from several angles, including timing, geographic location and infrastructure, total gas demand, and alternative scenarios,” the report said.
“In terms of timing, the shale gas supply from within China will take several years to reach credible levels.
“That means any impact of shale gas on LNG will be minimal at least until after 2020. The impact, however, will be felt after the end of this decade, though this also depends on the levels of total gas demand,” it added.
For overall Chinese natural gas demand, FGE’s view is that the country will have a reasonably fast growth of gas demand that can accommodate future supplies of shale gas as well as imported LNG.
In other words, with growing demand for gas as a whole, the negative impact of shale gas on China’s LNG imports will be moderate as there will be sufficient demand for both shale gas and LNG.
Geography
“The issue of geographic locations and infrastructure is also worth mentioning,” FGE noted.
“Currently, China’s shale-gas E&P concentrate in Sichuan and Chongqing of the Southwest. Although other parts of the country, including the Middle Yangtze region, may be developed, the initial volumes of shale gas will come from remote areas.
“It requires long-distance pipelines to reach the coastal areas, which are the primary targets of imported LNG.
“Last but not least, there are huge uncertainties for China’s shale gas development.
“For instance, by 2030, China’s shale gas production may be a smaller 4.0 billion standard cubic feet per day (bscf/d) – 31 million tonnes of LNG equivalent, or as high as 8.6 bscf/d (66MT of LNG equivalent).
“The difference is 35MT of LNG equivalent! Since the future prospects of China’s conventional gas are limited, a slow growth of shale gas under the low-case scenario will benefit both pipelined gas and LNG imports,” the report said.
Limits
In short, at present and during the coming years, the report said the impact of China’s shale-gas on the country’s LNG imports will be limited.
LNG importers will have other factors to consider such as the state of the economy and weak overall energy as well as demand.
“In the long run after 2020, however, the impact of shale gas will be felt by LNG importers as well as pipeline gas importers.
“At a certain stage in time, shale gas can be competitive as a credible source of supplies.
“Unless there is a large enough demand to accommodate everything, which is not entirely unlikely though, competition among all sources of gas supplies to China – conventional gas, shale gas, other unconventional gas, imported LNG, and imported pipeline gas – can be fierce,” FGE said.
The report says Sinopec is currently the most active player in China’s shale gas industry, which China National Petroleum Corp (CNPC) and listed affiliate PetroChina playing catch-up and other companies falling far behind.
Auction
“We expect that China’s third round shale gas auction may take place later this year. However, given the current situation of low oil prices, it is not surprising if the third round slips to 2017.
“The economics of shale-gas production suffered a serious setback due to the downward adjustment of city-gate gas prices in November 2015, as well as the decreased shale-gas subsidy starting from 2016.
“However, technology advancement is likely to improve the economics,” the report added.
FGE says that moving forward, shale gas remains a formidable future component of China’s gas supply because of the role of gas in China’s overall energy demand, the advantage of gas among three types of fossil energy, and government support.
All things considered, we project that, under the base-case scenario, China’s shale-gas output will reach 2.4 bscf/d by 2020 and 6.4 bscf/d by 2030.
Resources
China’s Ministry of Land and Resources (MLR) announced that China’s remaining technologically recoverable shale-gas reserves stands at 130.3 billion cubic meters (Bcm) or 4.6 trillion cubic feet (Tcf) by the end of 2015.
“Despite the vast shale-gas resource potential, China’s shale gas development has been straddled with challenges such as the complicated geological features, technology constraints and poor economics,” the report explained.
China’s shale-gas output was merely around 200 million cubic metres (19.4 mmscf/d) in 2013 and 1.3 Bcm (125.8 mmscf/d) in 2014.
Though shale-gas exploration and development attained some advancement in 2015 with output reaching 4.47 Bcm (432.6 mmscf/d), more than triple the output of 2014, the entire shale gas industry still failed to meet its output target – 6.5 billion cubic metres (628.9 mmcf/d).
Sinopec is currently the most active player in China’s shale gas industry.
Ventures
The company is conducting shale-gas exploration activities in several areas around China and has also signed a few Joint Study Agreements (JSA) since 2010 with foreign companies such as BP, ExxonMobil, Chevron, and Total.
Sinopec’s most well-known project is its Fuling shale-gas project in Chongqing municipality.
The field is the largest contributor to the company’s shale production.
In December 2015, Sinopec announced that its Fuling shale-gas field’s production capacity had successfully reached 5 Bcm a year (483.8 million standard cubic feet per day.
The company plans to increase Fuling’s production capacity could reach 10 Bcm/y (967.5 mmscf/d) by 2017.
Catch-up
CNPC and affiliated unit PetroChina were actually the first shale-gas explorers in China.
However, with no luck in shale-gas exploration and production (E&P) and the companies’ priorities being to focus more on conventional and tight-gas developments, CNPC/PetroChina have been surpassed by Sinopec in the last three years.
CNPC/PetroChina’s E&P activities are mainly in Changning-Weiyuan block (in Sichuan Province) and Zhaotong block (in Yunnan Province).
By the end of 2015, the Changning-Weiyuan block had reached a production capacity of 2 billion cubic metres/y (193.5 mmscf/d), while the Zhaotong block’s production capacity reached 550 million cubic metres (53.2 mmscf/d).
In addition, CNPC/PetroChina are the only companies who hold production sharing contracts (PSCs) with foreign companies.
Shell
One signed in 2012 is with Shell to explore the Fushun-Yongchuan block in Sichuan Province.
To date, the development of this Sino-foreign block is moving slowly and with no big progress.
The other, which was signed recently in March 2016, is with BP to explore Neijiang-Dazu block in Sichuan.
Though the final outcome remains to be seen, signing the PSC with BP this year still shows CNPC and PetroChina’s determination on the shale-gas front.
In 2015, CNPC/PetroChina’s shale gas output was estimated to have accounted for some 30 percent of China’s total shale output.
In 2012, China National Offshore Oil Corp. (CNOOC) started its first inland gas exploration project – the Wuhu venture in Anhui Province. After three years of exploration, CNOOC, in April 2015 announced the suspension of the project as the preliminary work results were not promising.
Lagging
CNOOC, Shaanxi Yanchang Petroleum Group and others are currently falling far behind.
Shaanxi Yanchang Petroleum Group is conducting E&P activities in Yan’an and other parts of the Ordos Basin in Shaanxi Province, where a “continental shale gas demonstration area” was established by National Development and Reform Commission (NDRC) in 2012, but only with a small amount of commercial flow so far.
“Moreover, there are several other state-owned, local or private companies engaged in shale gas business as a result of the second-round bidding concluded in early 2013.
“However, as most of the winners in the second-round bidding do not have sufficient knowledge on shale gas block geology, the progress of these companies in carrying out their obligations has been far slower than expected,” the report said.
One question being asked is are there still more shale gas auction rounds taking place soon?
“After the first- and second-round auctions for shale-gas licenses held by MLR in July 2011 and October 2012, respectively, a previously expected new shale-gas auction round has yet to occur.
Interest
“In 2013 and early 2014, a number of private and local companies showed great interests in participating in the third-round bidding.
“However, starting from the end of 2014, there has been less interest for a third round shale- gas auction in the industry. Why is this the case?
“First of all, the investment activities and exploration results of the second-round auction blocks have been disappointing.
“Impeded by a plethora of challenges and lack of significant capital investment, progress on shale gas E&P on the winning blocks has been slow for many private and local enterprises. “So far, no shale-gas flow has been detected from these 19 blocks. This makes both MLR and potential bidders more cautious about the next shale gas auction round,” FGE said.
“Second, under the weak economy, it is not a good time for private companies, who have less capital and less experience, to enter into the costly shale-gas industry.
Players
“The Chinese government is intended to attract more private companies to the next round auction, which is part of economic reform priorities for oil and gas sectors, but that needs time,” the report added.
“Third, the MLR is spending a long time to filter and include in the third round the high-quality shale-gas blocks where commercial gas flow could be more easily found and E&P is less expensive, hoping the third round, unlike the first two rounds, could make a big change to China’s shale-gas industry,” it stated.
It is reported that the national oil and gas research center, China Geological Survey (CGS), has submitted 40 blocks to MLR as the tender list.
“MLR will eventually pin down around 20 blocks for the third round auction. We expect that the third round shale-gas auction may take place later this year.
“However, given the current situation of low oil prices, it is not surprising if the third round slips to 2017,” FGE said.