China cuts government subsidies for shale

National flag of China
Source: DollarPhotoClub

China’s Finance Ministry announced today that it is cutting special government subsidies for shale gas developers from 0.4 yuan per cubic metre, paid between 2012 and 2015, to a 0.3 yuan per cubic metre subsidy from 2016 to 2018. The subsidy will be further reduced to 0.2 yuan per cubic metre in the 2019-2020 period.

The move will make China even less attractive to foreign investors, whose technological know-how it needs to unlock its immense shale gas reserves.

At 1,115 trillion cubic feet (EIA estimate), China holds the largest shale gas deposits in the world, but developing this potential has proved difficult. Tricky geology, shortages of water for fracking, the lack of infrastructure and technical expertise, paired with the fact that many of the hydrocarbon-rich areas are densely populated, have all contributed to China cutting its 2020 output target by half to 30 billion cubic metres (bcm) last August.

Energy executives including PetroChina Co. Chairman Zhou Jiping have urged the government to extend the current 0.4 yuan per square meter subsidy to 2020 or 2030 to spur growth in the usage of shale gas and stem the exodus of foreign investors from China. International companies including Royal Dutch Shell, Anadarko Petroleum Corporation, Noble Energy and Hess Corporation have all recently pulled back from previously agreed projects in China.

The newly-announced subsidy reduction will ’’certainly make it more challenging’’ for shale gas developers to keep already high production costs in check, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein told Bloomberg.

The country needs to “open the exploration licensing wider to more private players” in order to copy the success of the shale boom in the U.S., Beveridge said.

In January it became apparent that despite the huge deposits, China struggles to find attractive shale gas blocks to offer in a third auction of concessions, the date of which has not been yet announced.

China’s first shale gas licencing round in June 2011 attracted bids from the major state-owned oil companies, but only 2 blocks were awarded. 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.

With China’s gas demand recently forecast by the IEA to rise from the current 162 bcma to 471 bcma in 2030 and 600 bcma in 2040, successfylly tapping into the country’s shale potential could go a long way to satisfy China’s appetite for energy, as well as help reach their environmental targets. Anything that hinders shale development surely is bad news for the energy-hungry country. China’s finance ministry cited industrial development polices, technology advancement and cost changes as reasons for the decision, without elaborating further.

Meanwhile, China’s official stance on shale exploration is still filled with optimism.

On Tuesday, Xinhua News Agency, the official press agency of the People’s Republic of China, announced, quoting a report from BP, that China is set to become the world’s second-largest shale gas producer by 2035.

According to the report, from 2025 to 2035 China’s shale gas output will grow by an average of 33 percent every year. By 2035, China and the United States will provide some 85 percent of global shale gas output.

In the report, BP’s group chief economist Spencer Dale attributed the explosive growth to China’s rich shale gas resources, government policy support to exploration, and China’s current achievements in shale gas development.

What is more, earlier this month, the two Chinese state-owned oil and gas giants – PetroChina and Sinopec – have announced that China is on the way to overcoming some of the major obstacles to shale exploration.

One is the high costs of 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 told 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.

The lack of infrastructure is also being addressed, with new roads, leading to wells, are being built in areas where no such infrastructure existed.

Despite these developments, however, at 0.163 Bcf/d, the current combined shale output from Sinopec and Petrochina, 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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