June 27, 2018 / 8:45 AM / in 5 months

Breakingviews - China’s homegrown shale is worth the bother

Workers inspect equipment at a shale gas field of Sinopec in Fuling, Chongqing, China November 2, 2017. Picture taken November 2, 2017. REUTERS/Stringer

SINGAPORE (Reuters Breakingviews) - China’s shale gas push is a fully justified insurance policy. The People’s Republic produces a fraction of U.S. output: its fracking spurt started later, terrain is rough and wells deep. Yet fast-improving domestic technology and state support are helping push output up and costs down. With trade tensions rising, Beijing’s hedge is worth the effort.

China has one of the world’s largest shale gas resources, and is one of very few countries producing it commercially outside North America. Yet output was just 9 billion cubic metres (bcm), or 318 billion cubic feet, last year - largely from Sinopec’s Fuling field in Sichuan - amounting to less than 4 percent of rapidly rising annual demand. That’s meagre even if output nearly doubles, as forecast by Wood Mackenzie analysts, to 17 bcm by 2020. Such a level would only put it at roughly where the United States was in 2005, when shale took off.

In almost everything, though, the two experiences differ. Chinese wells are in mountainous, arid and often populous areas - a problem, given water is required for hydraulic fracking, and more is needed for deep formations. Deposits are structurally more complex. State players, and not innovative ‘wildcat’ operators, lead the way; Western majors are virtually absent and pipeline infrastructure is poor.

Strategic considerations nevertheless make the effort worthwhile, even just to offset rising overseas purchases. China currently imports roughly 40 percent of its gas needs, including liquefied natural gas (LNG) and pipeline gas from central Asia. While the United States is not a key supplier, heightened trade tensions will underline the need to diversify.

In any case, Chinese shale costs should fall. Technology has transformed shale before, and homegrown innovation, combined with a local supplier base, is already helping here. The cost of building a well has nearly halved over the past 8 years. Firms are also catching up with techniques to boost efficiency, like drilling multiple wells at a single pad.

There is also ample state support in the form of generous subsidies and tax cuts. That’s a powerful driver, at least while Beijing supports gas over, say, renewables. It may not be a Permian boom with Chinese characteristics yet, but options are valuable too.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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