WoodMac notes tight gas featured in China’s new unconventional gas subsidy

China’s Ministry of Finance announced a revised unconventional gas subsidy scheme, effective until 2023, Wood Mackenzie said, noting that it creates a subsidy pool to be shared by all unconventional gas producers based on their subsidy-eligible volumes.

Jul 1st, 2019

China’s Ministry of Finance recently announced a revised unconventional gas subsidy scheme, effective until 2023, Wood Mackenzie Ltd. said, noting that it creates a subsidy pool to be shared by all unconventional gas producers based on their subsidy-eligible volumes.

For the first time, tight gas is included in addition to shale gas, coal bed methane, and coal mine methane. The new subsidy scheme bodes well for Chinese national oil companies (NOC), analysts said.

“PetroChina will benefit more in the near term than Sinopec and CNOOC, partially due to higher anticipated unconventional ramp-up over the next few years,” said WoodMac analyst Xianhui Zhang. “Higher CBM output and better tight gas acreages should also increase PetroChina’s share in the subsidy pool.”

Zhang expects Sinopec will shift its focus towards tight gas projects in the Ordos basin and away from its shale gas operations, including its mature Fuling project and the newer Weirong development.

“On the other hand, CNOOC has invested in CBM projects onshore China through its acquisition of China United Coal Bed Methane Co. The potentially lower subsidy per unit of production could put it in a dilemma,” Zhang said.

Overall, the new scheme is expected to incentivize higher unconventional gas output over the next few years. However, operators still face challenges in bringing unconventional costs down, accessing infrastructure, and realizing commercial returns on investment, Zhang said.

“With the new revisions, the government has higher flexibility to adjust the subsidy pool based on unconventional gas development…. We expect the 2019 subsidy pool to be larger than 2018's $753 million grant, given the inclusion of tight gas,” Zhang said.

Contact Paula Dittrick at pdittrick@endeavorb2b.com.

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