China's Shale Gas Sector To Expand Despite Target Reduction
China’s shale gas sector continues to expand despite reduction in medium-term shale gas production, Fitch Ratings said Sunday.
“China's revision of its medium-term shale gas production targets reflects the numerous challenges facing the business despite the country's large shale gas resources. The sector, however, continues to expand with more capital allocated to it and as drilling costs fall, although a fairer allocation of shale blocks is the key to involving more private-sector companies,” Fitch said.
China has cut its 2020 shale gas production targets by more than half to 30 billion cubic metres, reflecting the difficult geology of its shale basins, higher drilling costs, water scarcity and the limited success domestic operators have had so far with shale blocks allocated in the two rounds since 2011.
Production has been low despite numerous benefits - including tax incentives and subsidies - provided to encourage production, Fitch said.
State-owned companies China Petroleum and Chemical Corporation (Sinopec) and Petrochina Company Limited continue to lead production. Gas producers, including Sinopec, were fined by the regulator in November 2014 for failing to meet spending pledges on allocated shale gas blocks, indicating the Chinese government is pushing hard to increase production, said Fitch.
Sinopec has had the most success to-date with its Fuling project. According to Fitch, this project has relatively good economics, and has benefitted from rapidly falling drilling costs (although they remain much higher than in the US) driven by the company's experience in this sector and its employment of different technologies.
The Fuling project's success cannot be easily replicated at nearby basins or other more difficult shale basins in China, but Fitch expects the two domestic oil majors to commit to higher shale gas production.
On 3 December 2014, Petrochina announced it will partner several domestic companies and spend over $4bn on shale gas development projects. In general, Fitch expects most Chinese national oil companies (NOCs) to trim their overall capex, but increase focus on domestic upstream activity to boost oil & gas production.
In the two rounds of shale block allocation to-date, central government-owned operators have generally been given access to shale blocks that overlap with their existing conventional oil & gas acreage.
“It appears that other operators have received more challenging blocks. However, the lack of production from non-NOC operators cannot be solely attributed to this, as inadequate access to technology and to an extent, capital have also been an issue for these operators. China is said to be preparing for a third round of shale block auctions. With greater knowledge of resources and costs involved, it is likely the state will focus on blocks that have stronger prospects in the next round,” Fitch said.