22 April 2019

Drilling into China’s shale gas failure

The sale should have taken place late last year but the Ministry of Land and Resources has reportedly put off the auction for the third round of shale gas mining rights until the second quarter. Media reports say the delay is down to a lack of interest from industry — the major companies all opted to stay on the sidelines.

News of the postponement rattled the share prices of some Hong Kong-listed shale gas-related counters, including rig-maker Honghua (00196.HK) and equipment provider Hilong (01623.HK).

The industry’s stalled exploration and development in China is in sharp contrast to progress in the United States. On the back of its technical expertise ranging from horizontal drilling to hydraulic fracturing, the US has gained a concrete footing on the new energy frontier, tipped as one of the most viable unconventional fuel fields.

The US is expected to be in the same league as Saudi Arabia and Russia in terms of oil and gas production in less than seven years, the International Energy Agency (IEA) predicted in a report. The American shale gas bonanza not only has enabled the country to cut its reliance on imported energy, it is also helping the US manufacturing sector bounce back on lower energy costs.

Beijing is counting on the immense reserves of the resource clustered in China’s southwest and northwest to boost its plans for a similar boom. On the surface, all the figures seem encouraging — Barclays notes that China could have up to 25 trillion cubic meters of technologically recoverable shale gas, representing 19 percent of the planet’s entire reserves and double the US’ total. The IEA makes similar estimates.

But the results of previous auctions and progress on the ground have only been disappointing.

For a start, there are some physical impediments — complex geology, water scarcity as well as inadequate infrastructure — standing in the way. It could take Chinese firms years to dig around those challenges but there are also some inbuilt, institutional challenges that have to be overcome.

As the Financial Times reported, the US shale gas industry has evolved into a vibrant ecosystem made up of numerous small and medium-sized energy companies, and thousands of oilfield service providers that also play an essential complementary role. But the landscape in China is drastically different, with state-owned behemoths PetroChina (00857.HK) and Sinopec (00386.HK) monopolizing the energy sector and fending off newcomers trying to get into the unconventional game.

Analysts accuse PetroChina and Sinopec of indiscriminately applying routine technology rather than a tailor-made approach to shale gas exploration and development. Little wonder then that output from wells can sometimes fall quickly after trials. The critics also claim that the two giants are reluctant to take time to drill new wells to sustain production when they can sit back and watch the easy money flow in from their traditional oil and gas business.

“If the big US oil groups, ExxonMobil and Chevron, had held 90 percent of US shale acreage, the pace of development would not have been nearly so fast,” Rhodium Group energy consultant Trevor Houser told the Financial Times.

Beijing has tried to give more impetus to private investors but new entrants should be wary about the difficulties. After they get the go-ahead, they run the risk of problems with upstream entities like exploration service companies, most of which come under the PetroChina or Sinopec umbrella and don’t have any incentive to lend a helping hand.

Ambitious targets have been set — Beijing aims to produce 6.5 billion cubic meters of shale gas annually by 2015 and up to 100 billion cubic meters by 2020 from the paltry 200 million cubic meters at present. Despite Beijing’s fresh push to further lower the threshold for private and foreign bidders, there’s still little reason for optimism about shale gas prospects in the country, at least in the near future.

– Contact the writer at [email protected]


EJ Insight writer

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