April 25, 2012 1:42 pm

China tries to copy US success in shale

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When the head of Cnooc, China’s offshore oil and gas company, travelled to the US this year there was one thing he wanted to see most of all: a shale well.

“Their fracking is on a scale that we rarely see in China,” Wang Yilin, Cnooc’s chairman, says with a hint of awe as he recounts arriving at a Texas well just as engineers were injecting it with highly pressurised water, a process called hydraulic fracturing or fracking. “We hope this technology will be useful for developing shale gas in China.”

China, the world’s biggest energy user, hopes that shale gas could become a cheap and plentiful new fuel source in the same way that it has in the US, where domestic natural gas prices recently hit a 10-year low.

For policy planners in Beijing, shale gas could be part of the answer to reducing China’s growing dependence on imported energy. China accounts for a fifth of global shale resources and has the world’s largest technically recoverable shale gas resources, according to estimates from the US Energy Information Administration. Beijing has made shale gas a cornerstone of its five-year energy blueprint, aiming to boost production from no commercial output today to 60bn cubic metres yearly by 2020.

China’s push to boost domestic energy supplies beyond traditional sources has been successful in many areas – it is the world’s biggest installer of wind turbines and the biggest builder of nuclear reactors. But the jury is still out on whether China can replicate this success in shale gas.

Getting shale out of the ground has proved challenging and Chinese energy executives say it will take years before China’s shale resources are developed on a large scale.

Dozens of exploratory shale gas wells are under way in China but initial results have been mixed. A recent shale gas blueprint issued by Beijing noted that the economic prospects for shale development were “relatively poor”, pointing out that many of the country’s shale resources were deeply buried in difficult geological terrain, such as the heavily faulted Sichuan basin.

China’s shale deposits also have more clay than the brittle “marine” shales of the US, which makes them harder to frack and less productive.

“The geology in China is very very complex,” said Chris Faulkner, chief executive of Breitling Oil and Gas, a US shale gas company that is exploring business opportunities in China. “There’s no procedure in the US that we can just lug over here and apply to this geology and expect to have the same results as the US.”

China also lacks some of the infrastructure that has made the shale revolution possible in the US, including an extensive gas pipeline network and oil workers trained in fracking techniques.

At a drill site in central Shanxi province, one worker on a coal bed methane well says his company cannot keep up with demand. “We are so busy we can barely take any holidays,” says Zhang Jianhua, while well drilling churns away behind him. His company specialises in horizontal drilling, a key technique for both coal bed methane and shale gas.

Interactive graphic

Shale gas extraction explained

Find out how natural gas is extracted from shale rock using a process called ‘fracking’ or fracturing

The structure of China’s oil industry, which is dominated by three large companies has been cited by some as a reason why shale development, which is risky and expensive, has been slow. To counteract this Beijing has changed the rules to allow private domestic energy companies to bid for shale gas projects. Policy makers plan eventually to liberalise natural gas prices to encourage companies to invest in shale gas.State controlled prices have deterred companies from investing in shale gas when they can make more money investing in oil.

China’s drive to develop shale gas has also helped fund shale projects around the world. As Chinese companies seek to master the techniques of extracting gas from sources such as shale gas and coal bed methane, they have invested billions in unconventional oil and gas projects overseas, particularly in the US.

Shale has become a key area of co-operation for the US and China, tempering the animosity that followed some of China’s earlier attempts to invest in the US energy sector, such as Cnooc’s failed $18.5bn bid for Unocal in 2005.

The shale well that Mr Wang of Cnooc visited was part of a project in which his company is investing more than $2bn to acquire a 33 per cent stake from Chesapeake Energy. “Cnooc has set its sights on America’s technology for shale gas,” he says.

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