Cross-posted from Kate Mackenzie at FTAlphaville.
Both countries were seen as great early hopes for replicating the success of shale gas in the US: Poland for its geology and enthusiastic government; China for its apparently vast reserves and for, well being China and getting things done. Both countries, clearly, are motivated to improve their domestic supply and hence their energy independence.
Yet both are taking longer than expected to reach material amounts of shale gas production. The FT’s Leslie Hook last week reported that few believe China will meet its 2015 production target of 6.5bn cubic metres – a modest amount, equivalent to 2 per cent of the country’s total gas production.
From Hook’s report:
“At the beginning we all thought it would be quite easy to meet that goal,” said Lin Boqiang, an energy economist at Xiamen University, pointing out that the goal was relatively low to begin with. “But judging from the situation now it doesn’t look that easy to achieve.”
Fingers are pointed at the usual combination of above- and below-ground factors. (See also: Poland, where 46 exploration wells have so far failed to lead to commercial production levels.) In China’s case, there’s particular frustration over technological expertise, the lack of pipelines and the ‘complicated geology’. One of the interesting things about shale is that formations vary greatly from one area to another, never mind between different countries — so just shipping in a few people with expertise in another, more successful shale play (ie, one in the US) won’t necessarily do the trick.
However China does seem to be getting interest from foreign companies with some solid expertise. Shell, Chevron, ConocoPhillips and Total are all planning to partner on exploration projects and Shell said in March it ‘may be less than two years away’ from major production there. And thus, that it was two years away from being to make a final investment decision.
There are still plenty of bullish predictions around about China’s shale gas reserves, which are estimated to be substantial. Here’s an example from last month from Deutsche:
Local industry experts estimate that by 2015, Shell, PetroChina and Sinopec could each contribute 1bcm, 1.5bcm and 3bcm of production, making the national 6.5 bcm target achievable.
Yet, according to the China Greentech Initiative, Sinopec is only targeting production of 0.13bn cubic metres in 2015; and PetroChina, 1.5bn.
Another potential problem is water. Shale gas production generally requires large amounts of it; and China is one of the more water stressed countries around.
It might not be a big problem in the near future, however, as the water situation varies from one region to another within China. Most of the shale gas exploration so far has been in Sichuan province, which is not among the water stressed areas, as this map of water stress from HSBC shows:
In China’s second and most recent round of auctions for shale gas exploration licences, the Guizhou, Hunan, and Chongqing provinces accounted for most of the licences offered — again, all in the ‘adequate’ category. Yet the licence round also offered licences in Zhejiang, Anhui and Henan — which are categorised, respectively “borderline adequate”, “stress”, and “extreme scarcity”. Perhaps unsurprisingly, none of those licences attracted a bid, but one has to wonder why they were offered in the first place.
Over to Poland, where several foreign companies who signed up for shale gas exploration have already left and Reuters says more could follow:
Prospects darkened this year after Marathon Oil and Talisman Energy followed Exxon Mobil in pulling out of Poland, which was once seen as Europe’s best shale prospect with substantial reserves and a friendly government.
These companies may not be the last, unless one or more of the 46 exploration wells drilled so far starts producing commercial-scale quantities of gas.
The Warsaw Business Journal in May quoted a Polish politician claiming that Chevron might also withdraw from the country, although the Reuters report last week cites a spokeswoman saying the company is committed to Poland.
The government has already made some changes, as Reuters reports, such as allowing wells to extend for up to 5,000 metres without requiring an extra permit, compared to 1,000m previously. The oil and gas groups are unhappy about the creation of a state operator, which has to be involved in all projects. But the main tension now seems to be that, as the geology has proved more frustrating than expected and exploration wells have disappointed, the exploration companies have sought more leeway on the length of exploration licences and work schedules.
