China Seeks to Replicate Shale Boom in Quest for Natural Gas
Here in the United States, oil and gas extraction via hydraulic fracturing remains somewhat controversial from an environmental perspective. But right now, China is hoping that a shale gas revolution will bring significant environmental benefits. An increase in China's natural gas production and consumption can help offset the country’s intense air pollution from rampant coal dependence, which is having disastrous impacts on air quality and human health. While China’s shale push is good news for U.S. supply services companies, the country’s challenging geologies, water shortages, as well as its population density and relaxed regulatory oversight create a host of unique challenges for ushering in a Chinese shale gas boom. $400 billion natural gas deal with Russia will increase total natural gas imports by nearly 25 percent from 2012 levels in the coming decades. However, what China is really hoping to tap are its shale gas reserves. An EIA report on global shale gas reserves from last year estimated that they are the largest such resources in the world, at roughly double those of the United States. But just because they’re big doesn’t mean that they’re easy to get to, or that China has the technical expertise needed to harness them. First, most of China’s shale resources are located at depths 2-3 times greater than U.S. reserves. This means that each well is more expensive, resource intensive, and time consuming to complete than wells in the United States. According to Bloomberg New Energy Finance (BNEF), the average cost to drill a Chinese shale well in 2014 cost around $11 to $13 million. Those estimates far exceed U.S. costs, of roughly $9.3 million per well in the Haynesville shale, $6 million in the Marcellus, $3.3 million in the Barnett, and $2.6 million in the Fayetteville shale. This is still significantly less than the estimated $16 million the average Chinese well cost in 2012, but BNEF estimates find that at such high costs, wellhead gas prices will still range between $11-21 per MBtu, depending on well productivity—in the same range as expensive LNG imports. Second, many of China’s shale resources are located in areas of extreme water scarcity, while others are in areas of high population density. The map below illustrates this challenge: New York Times reported that efforts by Sinopec, one of China’s national oil companies, to tap commercially viable shale in Jiaoshizen caused a massive explosion in which eight workers died, while flames engulfed the drilling rig and burned for hours. Locals with access to cars fled the area, while those unable to evacuate inhaled toxic gasses for days. Sinopec says the incident was a controlled gas flare and denies that anyone was harmed. In the wake of the disaster, farmers reported that their fields and streams were permanently fouled. Other independent studies have noted the Chinese government’s lack of interest in safety protocols that could prevent similar disasters in the future. Despite the unfortunate incident, the gas field in the province has been described as “the closest thing we have in China to a breakthrough project” according to Wood Mackenzie’s head of Asia and Pacific gas and power research. In face of these challenges, U.S. companies such as Halliburton and FTS International are optimistic about the possibilities in a 5-10 year time frame for massive growth in Chinese shale production. The benefits for them remain significant; not only are they forming lucrative partnerships with Chinese companies, but the geological challenges can potentially enable them to improve fracking technologies for applications in other countries, and here in the United States.
What to Know: Annual Energy Outlook 2015
April 17, 2015
April 17, 2015