The year 2017 marks another milestone for China’s unconventional resource development, and we have China becoming the world’s third largest shale gas producer, after the U.S. and Canada. During the current industry downturn, economic feasibility has become the main concern about the full-scale development of China’s shale gas, a reflection of the energy sector’s common dilemma. To many, it may seem that importing crude oil and LNG is better than the short-term option economically, making shale gas less attractive to the domestic industry. However, in order to meet the nation’s energy security, China has declared shale gas the country’s new strategic energy source and drastically increased investments in shale exploration and production. The shale revolution resembles a mirror, reflecting China’s growing and flourishing energy industry. The first round of China’s shale gas exploration rights concluded in 2011, and Energy China Forum (ECF) has observed China’s scale of shale gas commercial development expand at an unprecedented rate within the brief period of six years. As we at ECF became China’s largest international shale gas think tank, we have both witnessed the growth and development of China’s shale resources and grown alongside it ourselves.
Economic globalization, cross-boarder and multidisciplinary energy cooperation
Global energy crises have been a major headache for countries worldwide early in the 21st Century, and this is what inspired and encouraged the shale revolution in the United States. Other countries are now striving to follow that lead, in order to address rising demand for domestic energy security and to collaborate to solve energy supply challenges. As the largest energy consumer in the world, China itself is experiencing an ongoing increase in foreign energy dependence, and urgently needs a cross-boarder, multi-disciplinary energy cooperation platform, and that need catalyzed the birth of the Energy China Forum. In the year 2011, when China had just started exploring and utilizing its shale gas resources, ECF organized its first annual summit in Shanghai. Other countries, including the U.S., Great Britain, Poland and Russia were paying close attention to China’s shale progress. Government agencies, energy companies, equipment manufacturing corporations, think tanks, as well as legal and financial firms were collaborating to prepare for the policy, technology, finance, laws and regulations required for China’s shale revolution. The entire world was watching China’s energy sector and was expecting massive business opportunities and significant impacts on the global energy and economy resulting from China’s shale development plans. ECF has grown rapidly from an emerging forum to become China’s leading shale gas platform within the past 7 years, and it is steadily gaining a reputation on the global stage. This is exactly a microcosm of China’s booming development against a background of globalization. Having benefitted from the development of China’s energy sector, especially the shale industry, as well as from progress in economic globalization, China and Asia’s growth is inseparable from global development as a whole. Looking back on ECF’s past conference agendas, it’s easy to identify some of the conference "keywords," including "China’s opening energy market," "international cooperation," "multidisciplinary approach," "technical development," "innovative technology," "environmental protection" and "sustainable development." During the early days of ECF, ECF’s summit participants focused on North America and other regions’ advanced technologies, equipment and services to learn from them. By 2017, China had developed its initial and unique technical system to explore and develop its shale gas resources, customized to China’s geological conditions. Since 2014, an increasing number of East and Southeast Asia countries have come to China to study China’s shale development history and experiences, as well as the lessons learned during field applications. This is a rather fast transition and is a perfect indication of China’s "soft skills" as an emerging economic superpower. China is now exporting energy technology, equipment, services, capital and professionals to the world, and it is getting more confident about actively promoting global common development in the energy industry. Its Belt-and-Road initiative drove energy cooperation between China and the Belt-and-Road countries, paving China’s road to become the world’s major energy technology exporter. The Belt-and-Road initiative is a development strategy focusing on international connectivity and cooperation. China’s domestic energy technology providers also embrace the global tide of technical diffusion for shale gas and shale oil. Backed by the largest shale gas reserve in the world and a proven history of rapid technical development, China eyes a massive development potential in the area of international energy cooperation for mutual benefit. A coming period of strategic opportunity Due to the rising demand for environmentally-friendly growth, China’s energy structure has been shifting towards lower pollution, instead of lower costs, during recent years. Natural gas represents the cleanest fossil fuel available for commercial uses. Analysts predict that the 21st century is the century of natural gas, and that natural gas will surpass crude oil after two decades. By the year 2040, China’s shale gas is expected to contribute over 50 percent of China’s total domestic gas production, making China the world’s largest shale gas producer. It is widely believed that China’s shale gas industry has massive industrial potential. Shale gas was confirmed as China’s new mineral variety, independent from natural gas, in 2011, and in order to promote and encourage domestic shale development, China has promulgated a series of policies supporting the domestic shale industry. Some local governments also confirmed their own regulations and economic development plans for shale gas, making it a new point of growth for the local economy, and numerous emerging shale gas companies have been registered across China. In September 2016, China’s Energy Administration declared shale gas as an important clean energy baseline industry, pushing shale gas towards an unprecedented strategic position. In December 2016, China published its 13th Five-Year Plans for Energy Development, and the 13th Five-Year Plan for Energy Technology Innovation, establishing a bottom-line thinking strategy, enhancing domestic energy supply capability, promoting the reserve evaluation for shale gas and other unconventional resources, and developing these resources commercially to meet China’s demand for energy independence and security. In January 2017, China’s State Council published the Notice on Several Measures for Promoting the Growth of Foreign Investment and the Active Use of Foreign Investment to further relax restrictions on foreign capital entering the areas of shale gas and other unconventional resources. In May 2017, the Central Committee of the Communist Party of China, as well as China’s State Council, published Several Opinions on Deepening Oil and Gas Sector Reform. In July 2017, Opinions on Accelerating the Use of Natural Gas announced support for the construction of shale gas complementary pipelines and the nearby connection of shale gas sources with major pipeline systems. The policies encouraged shale gas pipeline and infrastructure construction operations, and opened up the market of petroleum pipelines to social organizations from the political side. China’s Ministry of Finance and National Energy Administration have reiterated that domestic shale gas development will continue to receive policy subsidies from 2016 to 2020, and the subsidies have been modified to 0.3 CNY/cubic meter during the first 3 years, and 0.2 CNY/cubic meter for the rest. China continues to subsidize shale gas development with the backdrop of increasingly strict subsidies for renewable energies.
E&P for shale gas: pros and cons
At current technical and market conditions, China’s shale gas E&P appears to have characteristics that include high capital investment, high risk, long project cycles, slow payback and low economic returns. According to statistics, cumulative domestic investment reached 36.5 billion CNY by 2015. The central and local governments invested approximately one billion CNY, bid-wining companies invested approximately two billion CNY, and the rest of the pool came from China’s national oil and gas giants. Sinopec is planning to invest 50.5 billion CNY in the upstream E&P sector, representing a 5.4 increase compared with last year. CNPC, on the other hand, will invest 143.6 billion CNY, an increase of approximately 10 percent. So far, domestic investment for shale gas comes mainly from Sinopec, CNPC and the government. The scope of investment is limited, however, mainly due to uncertainties of economic return, and that could negatively impact shale development in China. Sound business models need to be developed that will attract social involvement. By 2020, Sinopec plans to achieve shale gas production of over 12 bcm, and that requires an annual average increase greater than 40 percent. In the long term, PetroChina Southwest Oil and Gasfield Company aims to achieve annual production of 30 bcm of shale gas, and this number is expected to reach 50 bcm by 2030. China is also accelerating exploration in other shale gas areas, and plans to complete exploration and surveying work in Xuanhan-Wuxi, Jingmen, Chuannan, Chuandong, Meigu-Wuzhishan, and Yanan areas before 2020. Total geological reserves in these areas are approximately 3624 bcm. China has a fair command of the technologies related to geophysics, drilling, completion, fracturing and testing techniques for shale gas development. These technologies can solve many of the challenges encountered during operations, but they are still deemed uneconomic by many. The very high costs of project life cycle has retarded the development pace of China’s shale gas resources. The next focus for China’s shale technology is to transform technical recoverable reserves into economic recoverable reserves. As a result, major technical breakthroughs are necessary to lower operational costs. Currently, China is establishing major national science and technology programs across the shale industry chain. Critical tasks include "sweet spot" identification, deep horizontal well drilling and completion, shale development environmental evaluation and protection, and shallow horizontal well staged fracturing technologies for shale wells. CNPC is planning to utilize shallow shale sectors, reduce average platform cycles by 70 days, and reduce average costs per well to 40 million CNY, thereby fulfilling the target production of 12 bcm of shale gas production.
Environmental protection system is imminent
Chairman Xi has pointed out that the environment has to be treated with the same respect as human lives, and a strict system to monitor and control environmental impact must be developed. However, China’s environmental protection mechanisms for shale gas development are still under construction, especially those regarding ground water, fracturing fluids and induced seismic activities. Meanwhile, China’s existing petroleum regulating systems are insufficient to solve potential challenges brought by the rapid development of shale gas. China’s increasingly strict environmental protection policies conflict with the still-developing shale gas regulation systems. Currently the industry does not have a clear guideline, or answer, regarding environmental monitoring and regulating standards. As a result, there is obvious inconformity between environmental regulations across cities and provinces, and this has apparently restricted the effective development of China’s shale reserves. Energy China Forum’s achievements and progresses can be viewed as a perfect reflection of China’s energy and technology sector. I believe China will be ready to welcome a prosperous new era for shale gas full-scale commercial development, technical innovation and global cooperation. China’s energy foreign dependency will be further addressed, and a balanced development for the environment and economy is only steps away. Technical breakthroughs brought the world many uncertainties regarding energy sources and will certainly reshape the global energy structure. I believe China will become increasingly influential during this process.
Xiolai Zhou is the President and founder of Energy China Forum (ECF), President and founder of Shanghai United Institute for Unconventional Resources, and Executive Deputy Director, Energy Economy Committee of Shanghai Economist Association. Ms. Zhou spearheaded the establishment of Energy China Forum as a leading and independent China Energy Think Tank & cross-boarder, multi-disciplinary energy cooperation platform.