* New entrants fail to make progress in shale gas
* Beijing may go back to reliance on state energy giants
* Shale gas development likely to be long, slow haul
By Chen Aizhu
BEIJING, Sept 6 China has gone back to the
drawing board on how to develop what could be the world's
largest shale gas reserves after attempts to stimulate
investment and engineer an energy revolution brought little
progress in the gas fields.
Beijing has struggled to find a way to emulate the frenetic
exploration and production activity of the shale gas boom in the
United States, and the latest setback makes reaching even a
modest 2015 output target of 6.5 billion cubic metres (bcm)
This is only a fraction of the 224 bcm of shale gas the
United States produced in 2011, and would amount to just 6
percent of China's total current output of natural gas.
But even that target is under threat as an eclectic mix of
new participants in the sector drag their heels on development,
while China's biggest energy companies prioritise spending on
other oil and gas projects.
Frustrated with slow progress on shale from state energy
giants PetroChina and Sinopec Corp, China in
late 2012 encouraged a broad range of companies - including a
property developer and a grains trader - to bid in its second
shale gas auction.
Not one of the 16 firms that won exploration rights had ever
drilled a gas well. But they did promise to spend at least $2
billion over three years to pump gas from shale.
Beijing hoped this might give the sector a jolt. But eight
months later, the Ministry of Land and Resources (MLR) said the
firms have barely started seismic work and one of them sold a
stake in a block before doing anything.
The cost of drilling and the complexity of tapping China's
shale reserves have proven a daunting prospect for the shale gas
"The sector liberalisation looks unlikely to work in shale
gas, as its investment is too high and returns are too low,"
said Chen Weidong, a senior industry analyst.
BACK TO THE FUTURE
The lack of progress may lead Beijing to reverse the rare
move to open part of the upstream energy sector to broader
competition, government and industry officials said.
The world's largest energy consumer may have no choice but
to turn back to its more experienced energy companies to develop
shale gas, even if that means returning to the same slow pace of
progress that had frustrated China's bureaucrats.
"The criteria may return to whether the company has the
relevant technology and experience in drilling for oil and gas,"
said a government official with knowledge of the ministry's
How the ministry runs its third auction for shale gas
acreage is now being considered.
Slow development of China's enormous shale gas potential and
missed output targets may be bad news as the country tries to
develop domestic gas supplies to ease its heavy dependence on
dirtier coal and expensive imports of oil and gas.
The U.S. Energy Information Administration estimates China
is sitting on 1,115 trillion cubic feet of shale gas, nearly
double the size of the reserves in the United States.
BIG SPEND, SMALL RETURN
The problem for Beijing is that PetroChina and Sinopec are
reluctant to devote resources to shale gas after experiencing
hefty exploration costs for low output in pilot drilling.
China has to date spent around 10 billion yuan ($1.6
billion) to drill around 130 shale gas wells. PetroChina and
Sinopec, which hold the rights to the most prospective shale
acreage in China, have drilled most of them.
Only a handful of those wells are producing over 40,000
cubic metres of gas a day, deemed a break-even level for the $13
million to $16 million each well costs, officials said.
To achieve an official target of 6.5 bcm of shale gas output
by 2015, China would need to spend 126 billion yuan ($20
billion) on a total of 1,800 wells, provided each produces
10,000 cubic metres per day, according to industry estimates.
Neither PetroChina nor Sinopec have plans to drill close to
PetroChina, Asia's biggest oil-and-gas producer, had planned
to drill close to 400 wells over the next few years in the
Changning area of southwest Sichuan province, a
government-designated shale gas pilot zone, but is only expected
to complete the first 20 by end of this year.
It wants to see production results from those wells before
embarking upon a wider drilling programme.
PetroChina, which pumps over 70 percent of China's domestic
gas output, has successfully tapped another unconventional gas -
tight gas. The company is boosting output rapidly from tight gas
so has little incentive to push into shale. It also still has
less complex conventional reserves to tap.
The firm is tightening spending and is likely to record its
first annual drop in capital spending in 2013 since its Hong
Kong and New York stock market listings in 2000.
"The big firms are more cool-headed and their plates are
full with conventional and tight gas," said Sun Xiaogang, an
executive with service company SPT Energy Group.
That is probably why PetroChina repeated this month its
modest target to pump 1.5 bcm of shale gas by 2015, less than a
quarter of the national target.
One of the challenges Chinese firms have struggled to
overcome is how to adapt shale technology developed in the U.S.
to China's geology. Chinese shale formations tend to be deeper
than those that have provided the energy that has ended U.S.
dependence on imported gas and slashed reliance on imported oil.
"A realistic way to look at China's shale gas is that it is
a very rich resource, but one that needs a long process to
unlock," said the government official. China took nearly 20
years to embark on full-fledged development of its conventional
gas fields, he said, and shale may be similar.
"What the industry needs to focus on is to perfect expertise
in conventional and tight gas and then transplant it to shale