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China Shale Gas Projects Slow Down and Gradually Return to Rational

Wu Xinxiong, Director of the Bureau of National Energy, said at the recently held "Thirteen Five" energy planning conference, that by the year of 2020, productions of both shale gas and coalbed methane will reach 30 billion cubic meters. While when the Bureau of National Energy made development plan and outlook in 2012, the annual output of shale gas would achieve 60 billion to 100 billion cubic meters by 2020. The production target of shale gas being “cut in two at the waist” alerted the industry. Reporters of China Chemical Industry News made related interviews, and the industry believes that decreasing production expectation will "cool" the shale gas development, only so to promote the rational development of shale gas.

"Although the exploitation of shale gas in Fuling and other regions had​breakthroughs,  there is still a certain gap from the US large-scale commercially and industrially exploitation, and the production is minimal compared with China's natural gas." Said Feng Lianyong, professor of China University of Petroleum, who just returned from investigations in the United States, Canada and other countries, when interviewed by China Chemical Industry News reporter, he sees the rational signals from lowering the target of shale gas output in 2020. Earlier in China there were "explosive" investments and situation of going all out and fast on shale gas project. Through the summary of the problems revealed in the actual process of exploration of shale gas by the companies who won the biddings in first two rounds, shale gas development, already fried hot, is gradually returning to rational and moving toward the right path.

"This is a correction by the National Energy Bureau for ‘twelfth five' development plan. The construction and locations of China’s shale is more complicated than that of the United States, so exploitation technology needs to be localized to protect water and ecology. Plus with the relevant plans of introducing natural gas from Russia and Central Asia, our local shale gas exploitation can slow down." said Pang Changwei, professor of China Energy Strategy Research Institute.

Reporter of China Chemical Industry News learned that, the PetroChina’s production target of shale gas is 2.6 billion cubic meters for the year of 2015. The first of Sinopec’s experimental zones of shale gas, Fuling gas field , made ​​a breakthrough of production with a capacity 1.1 billion cubic meters per year, and plans to reach  5 billion cubic meters by the end of 2015. However, except Sinopec and PetroChina, the second batch of bidded companies by now have no big progress.

Dr. Cui Yongqiang, with Daqing Oilfield Exploration and Development Research Institute, said in the interview with China Chemical Industry News reporter: “Shale is not producing gas, and it is just a reservoir, and the worst reservoirs. Therefore the storage of shale gas is small, production is low and input is high, also exploration could contaminate water systems of both surface and ground, so the world's major developed countries are very cautious to the exploration of shale gas.”

"Development of shale gas involves technology development, industrial policy, natural gas prices, gas pipeline network, and environment supervision and many other aspects, so we cannot say China is now ready." Said Fanying, professor of Energy and Environment Policy Research Center of Chinese Academy of Sciences, to the China Chemical Industry News reporter, "China still has some defects and deficiencies in the implementation of preferential policies for shale gas, the applicability of the existing oil and gas regulations, pricing mechanism of pipe network, environmental supervision and other aspects.To establish a more comprehensive supervision and management mechanisms to regulate and guide the development of shale gas, is key to enter the large-scale commercial development for China’s shale gas. Government plays the most crucial role in it.”

Fan Ying said that before the related policies and supervision systems have been established , slowing down is a return to rational. Only now slowing down, so to possibly be fast and better in future.

Experts’ viewpoints

1. It’s not feasible to copy “American Model“

Due to resource endowments and technology accumulation, etc., we can only learn some experiences and lessons from the US revolution of shale gas, but cannot copy the American model.

2. Resource endowments are largely different

In my visit to the production base of shale gas in Pennsylvania, USA, I saw at some American shale gas blocks that their single-well output is comparable to our country’s conventional natural gas. The data of an American friend’s shale gas wells on home pastures shows that of the four wells, at the beginning the one with largest output can produce 160,000 cubic meters per day; and the smallest one is 100,000 cubic meters. After nearly three years’ production, the highest well produces more than 40,000 cubic meters, the rest are over 20,000 cubic meters. But a well in a test area in Sichuan produced  only more than 20,000 cubic meters at the beginning. Moreover, the US shale gas wells are more than 1000 meters’ deep, mostly sited on pasture, so there is no occupation of arable land and no removing, also more rivers are convenient for water supply.

In the United States, Pennsylvania stipulates explicitly that it is not allowed to take groundwater for fracture production. Comparing some shale gas blocks of our country with those of the USA, the reservoir conditions are much worse, exploration is more difficult, fewer rivers and water shortage. Resource endowment is most important, if the resource is not good, technology is helpless.

3. Technology accumulation is insufficient

In addition to resources, for the development of shale gas, the most important issue is technology. American technology is not grand new, but is re-integrated on the basis of development of the existing technology, and continue to summarize and improve constantly in 30 years.

Shale gas should be an industry improved through the continuous integration of the existing technology and in the process of engineering practice. If blindly emphasizing on technical research and innovation, it would not necessarily adapt to this industry. Breakthrough in technical constraints do not necessarily rely on the pursuit of special high-tech stuff, it often needs to learn from past experience and technical achievements, and in practical work constantly to grope and apply, thus to maximize its value.

4. The profit is uncertain

The U.S. government has long supported and encouraged local unconventional oil and gas resources, particularly shale gas exploration and development, and has gradually introduced a number of supportive policies.

Even so, the data obtained from a US consulting company showed that the US shale gas industry appeared profitable from 2008 to 2012, and cash flow are positive in the five years, but after deducting capital expenditures, that is net cash flow, which except positive in 2009, are negative in all the other years, especially in 2012, free cash flow was -USD60 billions.

This tells that the profits on the accounting records cannot stand scrutiny, and the entire industry's profitability is in a high uncertainty, and the occurrence of a certain degree of financial crisis is possible. While when we discuss the topic in China, we often only see the successful side of America's shale gas revolution, but ignore the deep financial status and relative risk.

Fast News —— Shale gas is not a "savior"

Shortages of traditional natural gas supply and the recent hotness of shale gas concept make some downstream users of natural gas throw their eyes on the development of shale gas. But I believe that shale gas is difficult to become a "savior" for the shortness of gas roblems for chemical companies.

On the one hand, China's large-scale commercial exploitation of shale gas needs time. The fact that the National Energy Bureau reduced the planned production of shale gas, confirms the development of shale gas is still in its infancy. Although Fuling Chongqing, Yanchang Shaanxi and other other demonstration blocks are good, but after all, the demonstration time is still not long, and its economical efficiency still needs market test, and how its impacts on the environment are also needs detailed inspection. According to the latest disclosed plan, by 2020, China's shale gas production will achieve 30 billion cubic meters, but when compared with the full-year apparent consumption of natural gas in 2013, that is 167.6 billion cubic meters, it is still very limited.

On the other hand, shale gas price is a big problem. At present, China's most successful shale gas development is the Fuling project of Sinopec, thus Jianfeng Chemical,also in Fuling, naturally become the first company in China to use shale gas for production of nitrogen fertilizer. However, the both sides have not yet reached an agreement on price. Sinopec defined the breakeven price of shale gas for commercial use as RMB 2.78 yuan/m3, while the resent price of natural gas for industrial use in Chongqing is RMB 2.54 yuan/m3, and for fertilize RMB1.30 yuan/m3, so Jianfeng Chemical hopes that the cost of shale gas could be less than RMB 2 yuan/m3

As expert analyzed, it will be difficult to be accepted by downstream companies if natural gas prices go more than 2 yuan/m3. Taking urea as an example, it needs about 700 m3 of natural gas for producing 1 ton of urea, and if calculating at RMB 2 yuan/m3, the cost of natural gas for 1 ton of urea is RMB1400 yuan, plus electricity, labor, management, marketing and other expenses, the cost will be more than RMB1500 yuan; while the present ex-factory price of urea is around RMB1500 yuan/m3. If calculating by RMB 2.78 yuan/m3, the selling amount of urea would not be enough to buy shale gas. So, for now, chemical companies cannot afford shale gas.

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