【Shale Gas Market】Everything About Shale Gas

Thread Content

This post was last edited by Guan Gongyu on 2016-4-5 at 16:24. Regarding shale gas, the production targets set in the 13th Five-Year Plan are exactly half of those in the 12th Five-Year Plan. With international oil prices remaining low, it raises the question: should China’s shale gas industry slow down or accelerate its development? file:///C:/Users/ADMINI~1/AppData/Local/Temp/msohtmlclip1/01/clip_image001.gif In 2015, BP’s World Energy Outlook forecast that China would become the world’s second-largest shale gas producer, after North America. However, in the **Energy Bureau’s 13th Five-Year Plan**, the target for China’s shale gas production by 2020 is 30 billion cubic meters. This is exactly half of the production target set in the 12th Five-Year Plan for shale gas, which was 60–100 billion cubic meters. At a time when international oil prices remain low, the much-hyped concept of shale gas seems to be losing its momentum. Those who once placed great hopes on it are now beginning to express doubts; in fact, in the eyes of most non-experts, developing shale gas has practically become a money-losing endeavor. On this occasion, Energy Review is holding its 25th academic symposium, inviting experts such as Zhang Kang, deputy director of the Advisory Committee at Sinopec’s Research Institute for Petroleum Exploration and Development; Sun Chunfen, chief engineer at the Economic Research Institute of CNPC’s Planning General Institute; and Bao Shujing, head of the Shale Gas Research Section at the Oil and Gas Resources Survey Center of the China Geological Survey, to discuss in depth what the current status of China’s shale gas industry is What challenges does China face in exploring shale gas? Should the development of the shale gas industry be slowed down or accelerated at this time? China’s shale gas: How much is available? China is rich in shale gas resources, and the geological conditions for their occurrence are relatively favorable. On land, from the Precambrian to the Cenozoic era, abundant organic-rich shales have developed. These shales are widely distributed in the major oil and gas-bearing basins in the north and across vast areas in the south, providing favorable conditions for the formation and accumulation of shale gas. As geological understanding has progressed, the U.S. EIA, China’s Ministry of Land and Resources, the Chinese Academy of Engineering, and CNPC (601857, stock forum) have all issued assessments of the potential of shale gas resources in China. According to the latest assessment results from 2014, China’s technically recoverable resources of shale gas amount to 12.85 trillion cubic meters, of which the technically recoverable resources of marine shale gas are 8.82 trillion cubic meters ； The technically recoverable resource volume of shale gas in the marine-terrestrial transition and lacustrine facies is 2.23 trillion cubic meters ； The technically recoverable resources of lacustrine shale gas amount to 1.80 trillion cubic meters. In terms of the gas content index, in the Cambrian Qiongzhusi Formation of the Sichuan Basin in China, the gas content in black mud shale ranges from 1.17 cubic meters to 6.02 cubic meters per ton ； The gas content in the black mudstone and shale of the Longmaxi Formation in the Lower Silurian is 1.73 to 5.1 cubic meters per ton. Compared to North America, where commercial development of shale gas is currently underway, the gas content in shale ranges from 1.1 cubic meters to 9.9 cubic meters per ton. This shows that, in terms of gas content in shales, the value and potential of shale gas in China are not inferior. With strong policy support, China has achieved phased results in shale gas development. By the end of 2014, a total investment of 23 billion yuan had been made, with over 400 shale gas wells drilled ； 21,818 kilometers of 2D seismic surveying and 2,034 square kilometers of 3D seismic surveying were completed ； 54 exploration rights allocated ； In total, nearly 500 billion cubic meters of geological reserves have been identified at three levels; of this, 106.75 billion cubic meters are proven geological reserves ； Four **level shale gas industrialization demonstration zones have been established. Commercial development of marine shale gas has begun in the Sichuan Basin, promising prospects for marine shale gas in the southern regions, and significant progress has been made in the exploration and development of continental shale gas in the Ordos (600295, stock forum) Basin. From 2005 to 2014, approximately 1.3 billion cubic meters of shale gas were produced in total, with an average production per well reaching 100,000 cubic meters per day. However, it remains very difficult to achieve the target of 6.5 billion cubic meters per year set in the 12th Five-Year Plan by 2015. U.S. Shale Gas: The Truth Behind the Boom. Since 2001, rising natural gas prices, coupled with significant advancements in drilling and fracturing technologies, have led to a vigorous boom in shale gas development around the world. The globalization of the U.S. \"shale gas revolution\" has sparked unprecedented enthusiasm for shale gas resources among various countries** and energy companies. Shale gas production’s share of total U.S. natural gas production surged from 1.6% in 2000 to 40.4% in 2013. Through the shale gas revolution, the United States has enhanced its energy \"independence\" and is expected to become a net exporter of natural gas by 2020. Between 2011 and 2040, U.S. natural gas production is projected to increase by 44%, with shale gas accounting for an 113% increase and making up 50% of total natural gas production. The unconventional oil and gas industry, represented by shale gas, has also opened up vast investment opportunities for the United States. Between 2009 and 2011, capital investment in North America’s upstream oil and gas sector exceeded its operating cash flows by $130 billion during that period; nearly 2/5 of this capital investment came from regions outside North America and industries other than oil and gas. North America thus transformed rapidly from a major exporter of oil and gas-related capital to a major importer of such capital. Due to a lack of objective understanding of the development process of shale gas in the United States, most people mistakenly believe that it took just a decade for the U.S. to achieve prosperity in the shale gas industry. In fact, the history of shale gas drilling in the United States dates back to 1821; however, early development primarily involved searching for reservoirs with naturally occurring fractures and the depletion-style extraction using vertical wells, lacking effective development engineering technologies. Marked by Mitchell Energy’s initiation of research and development on Barnett Shale gas drilling and production technologies in 1982, the modern era of shale gas development began. The year 2000 serves as a dividing line; prior to that, it was a phase characterized by breakthroughs in conceptual understanding ； After 2000, Barnett’s development experience quickly spread to new shale gas fields. Coupled with rising natural gas prices, modern shale gas development then entered a phase of rapid and commercial expansion. Thus, the development of the modern shale gas industry in the United States has spanned over thirty years to date. Due to a lack of systematic research on the market conditions in the United States, many professional and non-professional reports attribute the success of the U.S. shale gas \"revolution\" simply to thousands of small and medium-sized enterprises. In fact, according to a report published in April 2011 by the Independent Petroleum Association of America in collaboration with the renowned consulting firm IHS, the United States does have at least 18,000 independent onshore oil companies. The shale gas industry involves more than 8,000 companies in this sector, including oil and gas companies, oilfield service firms, and equipment suppliers. However, according to a research report by the U.S. think tank Future Resources Institute, the structure of the U.S. shale gas market is not as fragmented as the industry assumes. Taking the shale gas drilling market as an example, from 1982 to 2012, over 600 companies were involved in drilling operations in the six major modern shale gas fields of Barnett, Marcellus, Haynesville, Eagle Ford, Woodford, and Fayetteville. However, in terms of the contribution of each company to the total volume of drilling activities, during the experimental phase before 2000, almost all shale gas drilling was carried out by Mitchell Energy, resulting in a highly concentrated situation with one dominant company. The Mitchell Energy Company, which has been given a legendary status by outsiders, actually already had assets worth $2 billion by the time it began the Barnett development projects. It had invested in over 3,200 miles of gas pipelines and 54 gas processing stations, and boasted more than 30 years of experience in gas exploration, development, processing, and sales. It was by no means a \"small or medium-sized oil company\"; rather, it was one of the largest independent gas producers in the United States. After 2000, active operators remained concentrated among a few large independent natural gas companies: the top 30 operators in terms of total drilling volume accounted for 77% of all shale gas drilling in the United States, while 61% of these companies drilled fewer than 5 wells; nearly 34% of market participants drilled just 1 shale gas well, and 70% of those were speculators. Provide a reason for vigorous development. By uncovering the behind-the-scenes factors behind the rapid rise of shale gas in the United States, it is possible to objectively determine the current stage of development of China’s shale gas industry. Since China began shale gas exploration in 2005, significant progress has been made in areas such as the assessment of the resource potential for shale gas development, key core technologies and equipment systems, and the establishment of fundamental theories. It must be recognized that China indeed possesses the necessary conditions for large-scale commercial shale gas development. Of course, there are significant differences between China and the United States in terms of shale gas distribution and formation conditions, the maturity of development technologies, infrastructure such as pipelines, as well as mineral rights systems and market environments. The development of China’s shale gas industry faces unique opportunities brought about by the times, as well as distinct challenges. On the one hand, the energy revolution has provided an opportunity for the growth of the shale gas industry. The energy revolution is a landmark initiative put forward by our country to adapt to the new trends in energy development. Against the backdrop of a reshaping global energy supply and demand landscape, a long-term imbalance in energy consumption patterns, and increasingly severe environmental problems, driving revolutions in energy consumption, energy supply, energy technology, and the energy system, as well as strengthening comprehensive international cooperation, will become China’s long-term strategy. From the perspective of the energy system, China is still in an era dominated by coal; 66% of its energy consumption still comes from coal. Natural gas, which is the world’s second-largest source of energy, accounts for only 5.7% of China’s energy consumption structure. In the first half of 2015, China’s apparent natural gas consumption was approximately 91.5 billion cubic meters, representing a 1.4% increase on a year-on-year basis. Among this, urban gas consumption rose by 9.5%, while gas usage for power generation increased by 13.3%. It is evident that natural gas still has broad room for development in China’s energy consumption market. Developing shale gas as a crucial future source of natural gas will enable China to enter at an early date a new era of energy characterized by greenness, low carbon emissions, cleanliness, and high efficiency. On the other hand, **support helped cover the startup costs for the shale gas industry. Although international oil prices have plummeted since June 2014, at one point coming close to the total production cost of shale oil and gas in the United States, China **still attaches great importance to the exploration and development of its domestic shale gas resources.** In 2012 and 2013, the Ministry of Land and Resources held two rounds of tenders for exploration rights to shale gas blocks nationwide. The Ministry of Finance and the **Energy Bureau jointly introduced subsidy policies for the development and utilization of shale gas. From 2012 to 2015, a subsidy of 0.4 yuan per cubic meter was provided; this amount was reduced to 0.3 yuan per cubic meter from 2016 to 2018, and further decreased to 0.2 yuan per cubic meter from 2019 to 2020. In 2014, China spent approximately 420 million yuan on financial subsidies for shale gas; the expenditure was expected to reach 2.6 billion yuan in 2015, and 6 billion yuan by 2020. In fact, the U.S. federal government **has few specific support programs for shale gas. The 1980s and 1990s were the periods when the United States invested the most in research and development projects related to oil and gas, but the majority of this investment went into oil field development and deep-water technology research; very little funding was allocated to research and development of unconventional natural gas within the U.S. At that time, unconventional natural gas was “negligible” for them. In 1982, the United States implemented the Section 29 tax deduction policy, but this incentive was abolished by 1992. Therefore, the level of pricing and fiscal subsidies in our country is no less than that in the United States. Four issues that need to be addressed urgently. First, how to balance short-term and long-term interests? In the short term, the continuously declining oil prices will have a huge impact on the unconventional oil and gas services market. Low oil prices have exerted invisible pressure on the development of the alternative energy sector. For many domestic companies, investing in research and development for shale gas drilling and completion technologies and improving the economic viability of shale gas extraction is far more challenging than redeveloping existing oil and gas fields or importing pipeline gas. But in the long run, shale gas still has a strong outlook. As one of the important sources of natural gas in the future, shale gas can serve as a substitute for coal and oil in areas such as domestic use, power generation, transportation, and the chemical industry, thereby supporting China’s efforts to address air pollution, reduce energy consumption and emissions, and optimize its energy structure. Stopping the development of shale gas due to short-term drops in oil prices is undoubtedly short-sighted; finding a balance between low short-term returns and strong long-term growth prospects is the real challenge faced by shale gas companies at present. Secondly, who will bear the risks associated with shale gas investment? While calling for increased market competition, it should be recognized that in addition to investors, there will also be speculators in the market, which is an inherent feature of a market economy. Looking at the various players in the current shale gas market, we see that while there are active efforts to promote its development, large state-owned enterprises such as CNPC, Sinopec, and Yanchang Petroleum have already begun to get involved in this area; meanwhile, some local state-owned enterprises and private companies that won bids remain cautious and wait to see how things develop. Substantial exploration work has not yet been carried out in the latter, reflecting that, due to various factors such as technology, regulations, and prices, the market currently does not provide sufficient incentives for participants to take action. In other words, given that shale gas investment involves high capital costs, high expenses, high risks, and slow returns, the risks in the early stages of this industry are beyond the bearing capacity of some current market participants; therefore, the market is expecting the emergence of venture capitalists. From the perspective of the healthy development of the industry, the ideal risk bearers should be **the relevant functional departments**. Just as in the 1970s and 1980s, agencies such as the U.S. Department of Energy and the Natural Gas Research Institute jointly launched projects for eastern natural gas shale, western natural gas sandstone, and coalbed methane extraction, **they played a role in analyzing geological data, identifying and disclosing the recoverable reserves of shale gas deposits, and developing technical support; this provided ample information for the exploration and development of shale gas, thereby reducing the risks associated with further investment in these areas. Once again, how can technology be combined with unique features? Shale gas drilling and completion technologies are still under improvement. Based on existing technologies, horizontal drilling technology in China is already quite mature; the challenge lies in further reducing costs and improving the adaptability of reservoir modification techniques. Although the cost of horizontal wells for shale gas in our country has dropped from 100 million yuan to 50–70 million yuan, it remains significantly higher than that in North America. In China, marine shales generally exhibit a high degree of thermal evolution, low gas content, and large burial depths, resulting in poor economic viability. Large-scale deposits of normal-pressure to low-pressure shale gas exist there, where surface conditions are complex and the underground strata are highly fractured. As a result, the gas production per well is low while costs are high. It is necessary to continue reducing costs while ensuring wellbore stability and preventing safety incidents, which requires further optimization of drilling and completion processes, technologies, and equipment. Furthermore, in southern China, where land is scarce and the population is dense, drilling sites are located near populated areas; the discharged fluids are mainly used for irrigation and as drinking water sources. This puts significant pressure on shale gas operations in terms of noise reduction, treatment of drilling fluids and fracturing fluids, as well as coordination with transportation facilities. Finally, how to activate the mining rights trading market? The U.S. experience shows that the high liquidity of mineral rights is crucial for enhancing market competition and accelerating the development of the shale gas industry. At present, although the relevant authorities in our country have encouraged more competitors to participate in the bidding for shale gas blocks, the results of the two rounds of bidding have been minimal. A major obstacle lies in the issue of mining rights. A large number of shale gas exploration rights in China overlap with registered conventional oil and gas exploration rights, which are primarily held by large state-owned oil companies. Reports indicate that until the issue of overlapping mining rights is completely resolved, only 23% of non-overlapping blocks remain open to new investors. How to further implement reforms to the mineral rights system, establish and improve the mineral rights trading system, accelerate the exploration and utilization of existing mining areas, and at the same time promote the exploration and utilization of new areas, are issues that the relevant departments in charge of this system need to address urgently. In summary, the current difficulties faced in the development of shale gas in China stem, on the one hand, from changes in the international crude oil market, and on the other hand, from China’s mineral resource management system and the development model of its petroleum industry. Against the backdrop of **energy system reform, there are undoubtedly many variables in the future. One thing is clear, however: the exploration, development, and industrialization of shale gas must follow the basic laws governing the exploitation of mineral resources as well as the operating principles of market mechanisms. It is foreseeable that, as various levels of opening-up policies are gradually implemented—such as reforms in the prices of natural gas and its alternative fuels, the construction of transmission and distribution networks for shale gas, the relaxation of regulations regarding access to these networks, as well as the establishment of systems and platforms for mining rights trading—more and more enterprises from different economic sectors will be attracted to participate in the shale gas market, thereby revitalizing the entire natural gas market. Source: Energy Review magazine, November 2015 issue, 2015-11-23