PetroChina, Sinopec, optimistic about shale while drilling costs decline

Sinopec Headquarters
Source: WikiCommons, author: WhisperToMe

Two Chinese state-owned oil and gas giants – PetroChina and Sinopec have reiterated their commitment to shale gas – partly because drilling costs have fallen. At the same time, China National Offshore Oil Corporation (CNOOC) has announced that the steep decline in oil prices caused it to suspend its shale gas development in the province of Anhui.

A lot seems to depend on the deposits in question. While CNOOC said that the Anhui project – which has been drilled since 2011 – is not suitable for large scale development, Sinopec remains buoyant about the prospects of the Fuling shale gas project in southwestern Chongqing municipality, which is believed to have reserves of 2.1 trillion cubic meters.

By the year 2020 – under a 2015-2020 industry development plan laid out by the local government – 20 billion cubic metres (bcm) out of the target 30 bcm of gas is expected to come from the Fuling field. Back in February, Shi Yuanhua, technical director of well-logging at Jianghan Petroleum Administration Bureau, told InterFax he was confident Chongqing could achieve its target of 20 bcm/y by 2020. He noted that Sinopec already aims to produce 7 bcm/y from 10 bcm/y of production capacity at Fuling by the end of 2017.

“Fuling shale gas project can give good returns. Our investment will not stop,” said Sinopec Chairman Fu Chengyu at the company’s annual results briefing, last week.

Meanwhile, PetroChina Co., the country’s biggest oil and gas producer, announced in October 2014, that it is on course to surpass a 2.6 billion cubic meter target for shale gas production in 2015 from fields in the southwest province of Sichuan.

This turn for the better can be attributed to the falling costs of Chinese shale wells. Sinopec explained that only a year ago the costs of completing one unconventional well was 100 million Yuan (over $16 million). It has now fallen to 80 million Yuan ($13 million), and is set to further decline to 60 million Yuan (less than $10 million) or less in the next two years.

PetroChina tells a similar story: “With advances in technologies, single well costs still have room to fall and production can still rise,” President and Vice-Chairman Wang Dongjin said at a press briefing to discuss the company’s annual results.

He said drilling costs per well for the company have also dropped from 80 million Yuan (£13 million) to between 55 and 60 million Yuan.

“Our costs for shale gas are very competitive compared with ultra-deep wells for conventional gas projects such as in the Tarim Basin [in western China],” Mr Wang Dongjin said.

This fall in well costs is only partly down to technological advances. The other reason is the growing infrastructure, such as road leading to wells, which were previously absent.

“In the past we said that in the US operators could drill one well for $4 million and we thought that was too far for us to catch up to, but now looking at it, whether our block is in a mountainous or remote area and even if there is poor infrastructure or lack of pipelines, it seems cost effective overall,” Mr Fu said.

“With advances in technologies, single well costs still have room to fall and production can still rise,” Mr Wang Dongjin added.

This is all good news, none the least for oilfield companies like Halliburton and Schlumberger which expected to generate significant revenue from China’s shale gas push and had their hopes dashed when shale exploration in China proved difficult. Having said that, there is still a long way to go. Back in August 2014, Wu Xinxiong, the head of China’s National Energy Administration, downgraded the amount of shale gas China is aiming to pump by 2020 from 60 billion cubic metres (over 2 trillion cubic feet) mapped out in 2012, to just 30 bcm (1 tcf).

The current combined shale output from Sinopec and Petrochina, according to the Energy Information Administration (EIA), is 0.163 Bcf/d. This is miniscule compared to the U.S., where in the Marcellus region alone, the output was 14.6 Bcf/d in 2014, according to EIA data.

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