CHONGQING, China (Reuters) - On one of the many mountains in southwest China’s sprawling region of Chongqing, a dozen wells in an exhausted gas field are this week starting to take in fresh fuel piped in from Central Asia’s Turkmenistan, thousands of miles away.
For the next six months, state energy giant PetroChina, operator of the Xiangguosi storage facility, will also inject gas from Myanmar to fill the vast chambers 3,000 meters (9,900 ft) under the mountaintop.
China is aiming to turn hundreds of tapped and some still producing wells into storage facilities after a severe winter supply crunch left it short of the clean-burning fuel.
Beijing is trying to switch more of its energy use to gas from coal to help clear up the foul air in the country’s north.
The drive to fill up the country’s 25 underground gas storage sites before winter arrives will also bolster imports of liquefied natural gas in the world’s No.3 gas user. Consultancy Wood Mackenzie expects imports to touch 48-49 million tonnes this year, up a quarter from last year’s record level.
China’s underground gas storages (UGS) can barely cover 5 percent of its total consumption, lagging behind the international average of 10-12 percent and leaving it vulnerable to supply shocks or extreme weather conditions.
While the state planning agency has stressed the urgency of adding underground facilities, China’s regulated gas pricing and near-monopoly in key distribution infrastructure remain hurdles to clear for the business to flourish.
Led by PetroChina, China has embarked on a building boom over the next 5-8 years, spending over $10 billion to nearly double gas stores.
(GRAPHIC: China's soaring gas imports - reut.rs/2HeGFsu)
MAN-MADE GAS FIELD
Building a UGS is almost like developing a new gasfield - costly, time-consuming and requiring management skills to ensure safe operations.
China built its first UGS in 1999, the Dazhangtuo site near Beijing, and has since added 24 storage facilities with a total volume of 11 billion cubic meters (bcm).
Almost all the current sites are built from tapped or producing gas wells, the easiest and most cost-effective solution, said Ding Guosheng, of PetroChina’s UGS Institute, which is responsible for designing and planning the facilities.
It takes nearly two years of well testing and data analysis to identify wells suitable for storages and another three to five years to design and build.
“You need to make sure that dried wells don’t have leaks, detect where and how much water, oil or gas still wanders under there,” said Ding.
“We make sure the rocks are strong enough to sustain larger pressure when it’s turned into a storage.”
To build a storage, new wells are drilled to inject and extract gas, and pipelines and compressors added to gather and pump the fuel into the network.
Policy-setters are soliciting industry feedback to create a business model to boost investment from outside the dominant state majors, including exploring the feasibility of trading gas storage at a new exchange in Chongqing.
“Without government policy support and market-driven pricing no company would want to invest....as it’s expensive to build and costly to operate,” said Han Jingkuan, president of PetroChina’s Planning and Engineering Institute.
China regulates gas prices by setting the wholesale city-gate rates and allows fuel producers to charge 20 percent more in peak winter sales. Beijing has for decades been subsidizing residential users.
“In the absence of a commercial model...it remains a job for the national oil companies,” said Luo Jing, vice president of gas development of privately-run China Gas Holdings.
But third-party investment is being sought. Ma Xinhua, PetroChina’s top official for UGS business, said in March the state firm was in advanced talks with Chongqing government to co-invest in several storages in the gas-rich southwest.
(GRAPHIC: China's gas output - reut.rs/2HfbxJx)
With gas deposits buried at wells deeper than 3,000 meters and many located in the densely populated and mountainous southwest, China faces technical and safety challenges.
In the United States, the world’s top gas consumer, abundant and shallow salt domes are often used for storage.
In its relatively short 20-year UGS history, PetroChina has tapped limited foreign expertise, having only hired U.S. gas company Enron for designing the first facility in the late 1990s and recently France’s Storengy for technical appraisals.
But as China considers less familiar geological features such as aquifers and salt caverns, operational and management skills may come in handy from experienced players like Russian gas giant Gazprom and French storage expert Geostock.
Gazprom, which operates storage sites seven times the size of China’s, entered into a pre-feasibility study with PetroChina in January to build a facility at Shengping in northeast China. The storage, also a tapped gas field, is planned to service “Power of Siberia”, the mega pipeline due to send gas from Siberia to China from around 2020.
“(China faces) huge challenges as technical complexity will increase,” said Marc Fauveau, of business development with Storengy.
Reporting by Chen Aizhu. Editing by Lincoln Feast.