China finds shale gas challenging, halves 2020 output target

BEIJING (Reuters) - China has halved the quantum of shale gas it expects to produce by 2020 after early exploration efforts to unlock the unconventional fuel proved challenging, according to an industry website and a government source.

A natural gas appraisal well of Sinopec is seen behind a treatment pond of drilling waste in Langzhong county, Sichuan province March 1, 2011. REUTERS/Stringer

China, believed to hold the world’s largest technically recoverable shale resources, is hoping to replicate the shale boom that has transformed the energy landscape of the United States.

About four years of early evaluations and drilling have so far yielded one large find - Fuling field - in the most prospective gas province of southwest Sichuan, but experts say the Fuling success is hard to repeat due to complex geology and high cost of production.

Citing Wu Xinxiong, the head of China’s National Energy Administration, industry website reported that China aims to pump 30 billion cubic meters (bcm) of shale gas by 2020, versus an earlier goal of 60-80 bcm mapped out in 2012.

“The previous targets were more of a vague prospect, a hope. 30 bcm is a more realistic goal,” said a government source who was briefed on the new target.

The revision, which is pending government finalization, would be negative for oil service sector companies that were hoping to cash in on the major drilling activity needed to reach the earlier target.

"This is clearly negative for sentiment for some of the China oil service sector firms such as Anton Oilfield 3337.HK," said Scott Darling, head of Asia Oil and Gas research of JPMorgan in Hong Kong. "This admission on shale gas reflects the challenges facing China’s natural gas market."

It also means China would continue to focus on tapping easier-to-unlock gas resources, such as tight gas, which the Chinese oil firms are more experienced in, to reach a government-set total gas supply target of up to 420 bcm by 2020.

China’s tight gas output may hit 80 bcm by 2020, according to forecasts by the China Academy of Engineering, doubling its estimated output of 40 bcm in 2013.

The new 30 bcm shale gas target would mostly be contributed by the country's top two state oil firms, PetroChina 0857.HK and Sinopec Corp 0386.HK, experts have said, as they hold the majority of the country's oil and gas blocks, as well as the expertise.

The government’s efforts, led by the Ministry of Land and Resources, to open up the shale gas sector to independent players have had small success, as the blocks the ministry has to offer are of poorer quality and would entail hefty exploration costs.

Attempts by international firms to participate in the shale gas development have not been wholly fruitful either, with Royal Dutch Shell RDSa.L and Hess Corp HES.N the only foreign firms that have landed production sharing contracts, while most of them, including Exxon Mobil XOM.N and BP BP.L, have barely progressed beyond the preliminary stage of studying the blocks.

Reporting by Chen Aizhu and Judy Hua in Beijing, Charlie Zhu in Hong Kong; Editing by Muralikumar Anantharaman