Big reserves but little fracking before 2020

September 26, 2013 by James Woudhuysen

Reserves of shale gas in inland China, though unproven, may be the world’s largest.  At 31,000bn cubic metres (bcm), these ‘technically recoverable’ reserves probably exceed America’s stocks, and certainly beat those of Argentina, Algeria, Canada and Mexico. Indeed if China’s unproven shale gas reserves were all fully proven, they would do a lot for the Asia-Pacific region as a whole, tripling its rather modest reserves of proven gas.

Unproven is not proven, though. And even proven deposits of fossil fuels, while technically recoverable, may not be economically recoverable. Take American and Chinese figures for both shale gas and the lesser phenomenon of shale oil – a subset of broadly impermeable ‘tight’ oil, which, on top of shale oil, includes sandstones and carbonates. Those figures show that, by leaping into shale fuels first, the US has all of the world’s proven shale gas, for the present, and nearly double China’s share of the world’s reserves of unproven tight oil:

Technically recoverable land-based reserves of tight oil and shale gas

(in billion cubic metres (bcm) of natural gas: world, US and China figures disregard coalbed deposits and effects of rock heterogeneity)

Converting at one barrel of oil equivalent = 170 cubic metres of gas

                                                                                            Crude oil                       Wet natural gas

Proved tight oil & shale gas                                                   NA                                        2747
Unproved tight oil & shale gas                                              9860                                     16,056
Proved conventional                                                              4240                                       6230
Unproved conventional                                                         23,630                                    43,778
TOTAL US                                                                            37,910                                    68,811

Proved tight oil & shale gas                                                   NA                                            NA
Unproved tight oil & shale gas                                             5,440                                        31,573
Proved conventional, Asia Pacific                                       4,420                                        3,511
Unproved conventional, Asia Pacific                                  10,880                                      24,296
TOTAL CHINA and Asia Pacific                                       20,740                                      59,380

Proved tight oil & shale gas                                                  NA                                             2747
Unproved tight oil & shale gas                                          58,650                                       203,910
Proved conventional                                                          279,140                                     190,880
Unproved conventional                                                      232,900                                     250,380
TOTAL WORLD                                                                570,690                                     645,173

China’s shale deposits, in seven areas, are deep below the ground, and, by world standards, geologically tricky. To turn a profit from them, China may never need anything like America’s unique, no-nonsense law of capture, under which one owns the oil on one’s property even if it has migrated from under neighbouring land. But over shale gas, as on energy matters generally, Chinese local government already argues with Beijing. Tensions also surround the opening up of drilling rights to private firms beyond China’s Big Three national operating oil companies – PetroChina, Sinopec and CNOOC. Still, in September 2012 China’s Ministry of Land and Resources held a partially successful second bidding round for shale land rights in the south of the country, which is new to fossil fuels.

China isn’t blessed with many independent operators and contractors with the right expertise, equipment and competitive prices. Nor does it have a fully developed infrastructure for gathering and piping fluids, or the plentiful supplies of water that allow hydraulic fracturing to be done at scale. And compared to America, where in  2012 shale gas development created a veritable boom in ‘induced’, secondary jobs – those created in food services for shale gas workers, for instance – China is late to the shale party.

Partnership may be the way forward. PetroChina (owned by China National Petroleum Corporation, or CNPC) and Shell have done exploratory drilling for shale gas in the densely populated but well connected Sichuan Basin, despite high population density, proneness to earthquakes and high concentrations of hydrogen sulphide. And Sinopec (China Petrochemical Corporation) is in Sichuan, working in partnership with BP. Still, over about three years, 19 wells run by Shell lost no fewer than 535 days’ work through spontaneous village-based blockades and halts to operations called by Beijing.

Shale gas drilling has also begun in the Yangtze Platform in south China, a much larger area that, in both geology and gas data, is even more intractable than Sichuan. Then there’s the large, dry Tarim basin in Xinjiang, where reserves are very deep, but horizontal oil wells are already widely used. Also, there’s the small and relatively simple Junggar basin, south of Kazakhstan, which is rich in shale deposits – especially those of shale oil.

In a speech to the Asia-Pacific Technology Network in London, Fan Gao, an analyst at the Norwegian oil and gas giant Statoil,  lucidly spelt out how the real development of shale gas and oil won’t likely happen in China before 2020. China, she argued, already operates horizontal drilling. It is also learning how to ‘frack’ – hydraulically stimulate wells so as to fracture the shale around them. However China has yet to combine, at scale, horizontally-drilled wells with fracking.

Ms Fan had no doubts that China’s powerful manufacturing industry can soon fill the gaps in equipment for shale exploration, drilling and operations. China’s large-volume gas pipelines may be inadequate and dominated by the Big Three oil companies, she added; but in the medium term they’re likely to loosen up, both technically and commercially. However, China could meet with a real bottleneck in its lack of expert drilling and fracking crews. She believes China will prefer to expand its gas imports from Central Asia and East Russia, supplementing these with liquid natural gas (LNG) brought to it by tanker.

At a conference on shale oil held in 2012, Tim Guinness, founder of Guinness Asset Management,  made remarks that were congruent with those of Ms Fan. In gas, Guinness noted, China presently consumes just a fraction of what the US does, so it may not bother with fracking much for some years.

The figures seem to bear Mr Guinness out. They show that China’s own output of gas is not sufficient for it fully to meet its domestic needs. However, until China’s rapidly growing demand for gas really streaks ahead, the shortfall isn’t grievous enough to require an immediate massive spurt in shale gas production.

How national output of gas lags national consumption needs: the examples of China and the US

(in billion cubic metres (bcm) and per cent increase, 2011-12)

                                                                                            China                                     US

Production of gas, 2012, bcm                                        107.2                                     681.4
Rise over 2011, %                                                             4.1                                          4.7
Consumption of gas, 2012, bcm                                   143.8                                      722.1
Rise over 2011, %                                                              9.9                                          4.1

China’s government might prefer not to have spent 2012 importing 23bcm of gas from Turkmenistan, as well as 7bcm of LNG from Qatar.  Moreover, central government favours making a switch from coal to gas, so as to lower carbon dioxide emissions. The prospect for state taxation of the spoils of shale also attracts the Communist Party leadership to the nascent shale gas industry. Yet China will probably go on importing natural gas for a few years before it gets serious about shale.

It is worthwhile looking at shale gas in China from the standpoint of innovation. America’s Stanolind Oil first fracked gas, from limestone in southwestern Kansas, in 1947. Yet only after the 1973/4 oil crisis did President Gerald Ford’s Energy Research and Development Administration (ERDA), created in 1975, make the extraction of gaseous and liquid fuels from coal and shale one of America’s five priorities in energy R&D. State R&D in horizontal drilling and the seismic mapping of fractures followed,  but it took until 2007 for 1970s reports on shale to be “eagerly sought out by industry people“.

America’s dalliance with shale has been a long time coming. Yet even in the light of this, China has hardly rushed to catch up. After America’s big dive into shale in 2007, CNPC only drilled and fractured China’s first shale gas well in July 2010. Similarly, to begin the serious phase of Chinese shale development seven years from now denotes a relatively slow schedule, by Chinese standards.

There is already scepticism about the authorities’ target of pumping 6.5bcm a year of shale gas by 2015.  Scepticism also attends the annual 100bcm which the authorities now hope for by 2020. Sceptics point to the fact that the gas fields of the Tarim Basin and the north lie in areas where the all-important water for hydraulic fracking is scarce.

It’s a fair point – overcoming China’s problems of water scarcity to allow fracking may not be in the gift of the Chinese Communist Party, especially given its current state. Yet there is also something else going on with all the fears spread about fracking, water and China.

For years the West has complained about China’s coal-based carbon dioxide emissions.  Yet as fears over global warming have receded, so the old distaste has morphed into a new campaign: against the disruptions to China’s water supply that its coal industry causes now,  and that its shale industry will set off later. So even though China’s exploitation of shale has barely begun, and will likely prove much safer than its still bloody efforts in coal mining, American environmentalists in particular like to tell China not to follow the path taken by the US.

They are foolish. Just as China can look forward to independent manufacture of airliners after 2020, so by 2020 it has the technological possibility, at least, to overcome the barriers of difficult and deep rock, and of elusive supplies of water. And as we have seen, economic realities may anyway make China choose not to delve into shale very rapidly.

For China to pull out a full 100bcm of shale gas a year in 2020 might require 34,000 rigs and so up to 1bcm of freshwater. But given that the country presently consumes 600bcm of water,  which itself is only about three-quarters of its exploitable water, even half of China’s current economic growth rates would easily pay for a water infrastructure to support fracking.

Whether China will want to make a genuine and urgent priority of shale gas in practice, however, remains an open question.

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