China: good news for tight oil, bad news for shale gas

Oil jacks in China
Source: PetroChina

Last week brought China the largest tight oil discovery in the history of the country but also the news of an exit of a major E&P player from its Sichuan shale basin.

The news of the discovery of the country’s largest tight oil deposit in northwest Shaanxi Province  was reported by the state-run Xinhua news agency on Tuesday. At around 100 million tonnes, the deposits in the Changqing field are the largest ever discovered in China, and will produce 700,000 tonnes of tight oil annually, Xinhua news reported.

Tight deposits – which along with shale are classed as an unconventional source of hydrocabons – contain oil / gas which is produced from reservoir rocks with such low permeability that – just like with shale – the deposits need to by hydraulically fractured to produce at economic rates.

Tight oil production capacity in the Ordos basin, where Changqing is located, is more than 1 million tonnes, the paper said. Quoting the Xinhua News Agency’s China Oil, Gas & Petrochemicals (OGP) newsletter, Reuters reported that in the first quarter of 2015, Changqing produced 6 million tonnes of crude oil, or 487,600 barrels per day.

Good news for tight oil – bad news for shale gas.

The Changqing discovery comes at a time when the U.S. oil and gas major, ConocoPhillips, announced it is pulling out of two contracts and agreements it had signed with China’s state-owned companies for the exploration of the country’s prolific Sichuan basin.

While according to the U.S. Energy Information Agency, China is the richest country in the world when it comes to its shale gas reserves (at 1,115 trillion cubic feet of technically recoverable resources), the country’s shale dream has been slow to realise. After two disappointing shale licencing rounds (in 2011 and 2012), the third auction – initially scheduled for 2013 – has been delayed as as the government is struggling to identify prospective, investor-friendly blocks to attract potential investors.

For China, developing its shale gas reserves would have the triple effect of: lower energy costs, replacing coal with gas for power generation, which would reduce air pollution, and thirdly – curbing the country’s dependence on foreign energy.

So far most of the shale development has been concentrated in the Sichuan basin, where in 2013 Royal Dutch Shell signed a production sharing contract (PSC) with PetroChina for the Fushun-Yonghchuan block, and where ConocoPhillips worked with Sinopec on the Qijiang block.

Last Friday, however, ConocoPhillips announced that it is in the process of terminating this latter cooperation – carried out under a joint study agreement (JSA) with PetroChina – because the 404,686 hectare Qijiang Block “had been declared a military exclusion zone and would not be open for foreign cooperation”.

Also, Conoco said in its 2014 annual report that it had decided not to pursue a production-sharing contract (PSC) for the 202,342 hectare Neijiang-Dazu Block in the basin, after signing a joint study agreement (JSA) with PetroChina in February 2013.

Despite these exits, ConocoPhillips disclosed to Interfax that it remains interested in shale gas in China and is in talks with PetroChina about further opportunities.

This was confirmed by Wang Dongijn – CNPC’s Deputy General Manager and president and vice chairman of PetroChina – who held discussions on 15 May with Conoco Chief Executive Ryan Lance on deepening cooperation in oil trading and unconventional exploration.

“Though it’s unclear which block or in what form Conoco will return to Sichuan, we know that the two companies have been in talks for a long time and Conoco has never intended to give up Sichuan,” said Li Minglu, deputy director general of the Sichuan provincial energy bureau.

Meanwhile, the state-owned giants continue pushing forward with shale exploration in the country. According to the portal Asian Oil & Gas: “as of December 2014, Sinopec completed 75 test wells at Fuling boosting production capacity target of 2 Bcm. The field cumulatively produced over 1136 Bcm of shale gas and maintains an average daily output of over 3.6 MMcm. Now the company looks to ramp up output to 10 Bcm by 2017.”

According to the China Daily, PetroChina, a listed arm of the China National Petroleum Corp (CNPC), has drilled some 40 wells in the Sichuan and Yunnan basins. The group plans to drill 154 wells in the Changning-Weiyuan blocks in Sichuan between 2014-2015, plus produce 6 Bcm of shale gas by 2020.”

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