In the same week that Shell agreed to explore for shale oil in China, BP is reported to be exiting its two Sichuan basin shale gas blocks. Wood Mackenzie eastern Asia upstream research analyst, Xianhui Zhang, provides commentary.
"We understand that both poor well performance and challenging above-ground conditions contributed to BP's decision. Such difficulties – both for national oil companies (NOCs) and oil Majors – highlight the unique challenges of developing shale gas in China. These include complex and deep reservoir geology, low well productivity, marginal economics and infrastructure constraints.
"China’s shale gas formations tend to be deeper, more fragmented and less pressurised compared to the US. Much of the discovered resource is located in mountainous terrain; meaning it takes more capital, labour and time to develop. In addition, we understand BP was chasing deeper targets than currently being drilled at Sinopec's Fuling development and PetroChina's three current shale projects.
"The announcement underscores the difficulties facing international oil companies (IOCs) looking to build an upstream onshore business in China. Despite a large number of shale agreements being signed with IOCs over the last decade, all have now failed and been abandoned. If the government wants the NOCs to hit its ambitious targets with assistance from experienced foreign companies, it would need to offer further incentives. We think that offshore China provides a stronger commercial opportunity for foreign companies, compared to more challenging onshore developments.
"Wood Mackenzie forecasts 15 billion m3/yr of shale gas production by 2020; significantly lower than the government’s target of 30 billion m3. While we still expect double-digit growth in shale gas output this year, development challenges remain. Shale gas is an important part of China’s gas supply story in the long-run, but for now it is a minor contributor."
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