China shale gas challenges match its potential, expert suggests

China faces significant geologic, development, transportation, and bureaucratic challenges if it expects to fully exploit its shale gas resources, even though they’re probably greater than those in the US, an IHS CERA expert said.

“If you live in Beijing and travel in energy circles, you probably get a shale gas conference notice every week,” Xizhou Zhou, who directs IHS CERA’s China energy practice, said during a Mar. 15 seminar at the Woodrow Wilson International Center for Scholars. “There’s a lot of exuberance there, and talk that it could happen in 5 years’ time. We’re not so certain that it can.”

The likely delays could give China time to develop necessary regulations to minimize environmental damage, a second speaker suggested. “Planning and preparedness is an overarching principle,” said Briana Mordick, a Natural Resources Defense Council staff scientist based in San Francisco. “The US was caught off guard. China has time to plan.”

The biggest differences in China’s shale gas resources from those of the US are that China’s are owned by the government, regulated prices make it very difficult to estimate profitability, pipelines are not nearly as extensive, and state-owned companies are dominant instead of independents that helped develop technological innovations in the US, according to Zhou.

China nevertheless is firmly committed to using more gas to reduce its heavy reliance on coal—to the point that it is willing to pay premium prices for pipeline and LNG imports, he said.

Very early stages

“Development is still in the very early stages, and most wells are drilled in conjunction with an international partner to get better estimates,” Zhou said. “Leases which are being handed out are to drill wells where geological work hasn’t been done yet in any depth. Companies there are completely new to the industry. Many haven’t even drilled a conventional gas well.”

A major risk is that such newcomers may pull out after 3 years when they realize they aren’t getting any money back, he indicated. Government ministries also don’t always talk to each other, although there are signs that this is improving, Zhou said.

He noted that at the IHS CERAWeek conference last week in Houston, there were a record number of Chinese attendees. “The Commerce Ministry sent a delegation there for the first time. We tried to help them meet with people who are working in the Eagle Ford and Barnett shales.”

Zhou said, “The key lesson is to have very open channels of communications. Whether it’s a commerce, environmental, or oil and gas regulator, opening channels is important. Just failure on one could disrupt the whole industry. It’s not just water, pricing, or some company failing to meet its financial objectives. Everything has to be worked through.”

Contact Nick Snow at nicks@pennwell.com.

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