China struggles to find attractive shale blocks for 3rd auction

Drilling rig in China
Source: DollarPhotoClub

With estimated reserves of 1,115 trillion cubic feet (tcf), China holds the largest shale gas deposits in the world. It is therefore surprising to find that it’s struggling to find attractive shale gas blocks to offer in a third auction of concessions.

So far around 400 wells have been drilled and geological surveys conducted in blocks awarded in China’s first two exploration auctions. The second auction resulted in only eight exploration wells drilled across 19 blocks and only four of them have been completed or reached the stage of horizontal fracturing. This is extremely disappointing given that in the U.S. – according to the Energy Information Agency – more than 65,000 shale wells have been drilled in less than a decade.

The slow progress of China’s shale exploration resulted in the country cutting its 2020 output target by half to 30 billion cubic metres (bcm), or 18 percent China’s current demand. So far only one area has delivered on the shale promise – the huge Fuling field explored by the country’s oil and gas giant Sinopec. Analysts say that a find of similar magnitude is unlikely due to difficult geology, scarcity of water and prohibitively high drilling costs.

All this disappointment may hold up the next auction round.

“It’s massively challenging (to find good blocks),” an anonymous government source told Reuters.

“The Ministry of Land and Resources’ (MLR) has set no timeline for the next tender,” another government source said.

Oversupply of oil and gas from the U.S. and the plummeting energy prices are likely to further deter investors who will baulk at pumping funds into unproven fields. It seems that the only companies that China can look towards when it comes to exploring its untapped shale potential are the two state-owned giants Sinopec and PetroChina who say that they are committed to developing the sector despite cheaper oil and gas prices.

For now, the 10 bcm a year Sinopec plans on producing from the Fuling field by 2017 has got a long way to meet even the revised down target of 30 bcm.

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