china's ragtag shale army a long way from revo

China's ragtag shale army a long way from revolution

Read more: http://www.smh.com.au/business/world-business/chinas-ragtag-shale-army-a-long-way-from-revolution-20130311-2fuu2.html#ixzz2NEAp0f8v

China's plans to unlock what could be the world's biggest shale gas reserves risk running further off track after 16 firms awarded exploration rights in the latest auction lacked one core skill - not one has drilled a gas well before.

Beijing is hoping shale gas can transform the country in the same way as the US boom, though to date there has been little commercial production and a target of producing 6.5 billion cubic metres of gas by 2015 in the world's biggest energy consumer looks out of reach, according to industry experts.

The lack of experience exploiting shale among new firms scrambling to enter the sector will make it an even bigger challenge to get at the gas, and if they fail to deliver China will struggle to reduce its dependence on expensive imports of oil, liquefied natural gas and coal.

The auction winners will have to buy in the expertise they lack, offering the prospect of lucrative contracts for specialist foreign firms such as Schlumberger or Halliburton for the "fracking" (hydraulic fracturing) technology to get at the gas.

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The first shale auction two years ago was dominated by big Chinese state energy firms such as CNOOC Ltd and PetroChina .

The second auction attracted interest from more than 100 firms, an eclectic group that included a real estate developer, a grain trader and a tobacco dealer, lured by gas subsidies and aided by easy access to funds.

The profile of the bidders reflected both the fever pitch over shale and its potential and the government's attempt to replicate the conditions that underpinned the US shale revolution: competition among a myriad of independent drillers.

"They will have received very little data about the blocks, will have very little idea about what it is going to cost them to do exploration wells and no idea about development costs," said Tony Regan of Tri-Zen Consultancy in Singapore, which advises gas companies doing business in China.

"They are driven by the attraction of getting in early into what could be a huge market."

China's potential is clear. The government puts technically recoverable shale gas reserves at 25 trillion cubic metres, while the US Energy Information Agency has them at 36.1 tcm, in both cases larger than US reserves estimated at 24.4 tcm.

But China's shale deposits are mostly found deeper underground than in the US and reserves are more scattered, making it difficult to adapt the technology that has worked in the United States to China's geology.

Big oil firms including PetroChina and Sinopec Corp working on what are considered some of the best prospects are making slow progress. They had drilled more than 60 shale wells by May 2012, mostly in the southwest Sichuan basin, but PetroChina had produced only just over 11 million cubic metres in its most promising area by November.

US shale production in 2011 rose to 240 billion cubic metres, nearly 30 percent of total US gas output.

The task for the winning companies in the second auctions is made more difficult by the lack of potential in the acreage that was on offer, said a government oil and gas expert with direct knowledge of the auction. The 20 blocks were in 8 provinces including Sichuan, Quizhou, Henan, Hubei and Jiangxi.

"Based on the understanding of the reserve potential of these blocks, I am not optimistic," the expert said. "Very few would yield sizeable finds and even if they strike gas, it could hardly be profitable due to the high exploration cost."

Reuters


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