The challenges of retrieving a buried treasure

Updated: 2012-04-20 10:56

By Chen Shaofeng and Zhu Qiang (China Daily)

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The challenges of retrieving a buried treasure
Zhang Chengliang / China Daily

China's sustainable development is under pressure, because of its surging appetite for energy resources and serious environmental pollution. To meet its energy demands and reduce greenhouse gas emissions, the Chinese government has striven hard to expand the use of clean energy resources. Shale gas finds the very niche in achieving both goals. Despite little progress at the moment, in the long run shale gas may be a game-changer in China.

Shale gas refers to natural gas that is tightly trapped within shale formations deep underground. It is widely dispersed across the world. The US Energy Information Administration has estimated 187 trillion cubic meters of technically recoverable shale gas in 33 countries has been assessed, including in China and the US. This huge resource base would sustain current production levels for more than 250 years.

It is estimated that from 2008 to 2035 natural gas demand will rise 44 percent; more than a third of the growth will come from shale gas. The top-three countries with the largest shale gas reserves are China, the US and Argentina, possessing 36 trillion cubic meters, 24 trillion cubic meters and 22 trillion cubic meters respectively.

The US and Canada are taking the lead in developing shale gas. Production has rejuvenated the natural gas industry in the US, enabling it to supply 90 percent of its demand for natural gas in 2010. By 2010 shale gas production in US had reached 100 billion cubic meters annually and grown 20 times since 2006. Its supply is projected to increase from 14 percent of total US gas production in 2009 to 45 percent by 2035.

BP forecasts that growth in shale gas will make North America and South America energy self-sufficient by 2030. US President Barack Obama even hailed natural gas as being part of the solution to reducing US oil addiction.

China's demand for energy keeps surging. Other than expediting the development of renewable energy, China has placed emphasis on the use of natural gas to meet the goals of ensuring energy supply and cleaning the environment. The abundant shale gas resources not only help quench China's soaring energy demands, but also contribute to improving its energy mix.

A survey by the Ministry of Land and Resources shows that China possesses 134.4 trillion cubic meters of onshore shale gas reserves and that the exploitable onshore (excluding the Qinghai-Tibet Plateau) reserves total 25 trillion cubic meters. According to estimates from the US Energy Information Administration, China leads the world, with about 36 trillion cubic meters of recoverable shale gas reserves in several basins on land and under the South China Sea. The reserves are believed to be able to meet China's demands for more than 300 years at the current rate of consumption.

Based on China's vast resources, the National Energy Administration issued the 12th five-year plan (2011-15) for shale gas in March. It has given priority to finding out the shale gas resource potential during this period. It is projected that China will witness large-scale commercial production during the 13th five-year plan.

The government set a target of producing 6.5 billion cubic meters of shale gas by 2015 and aims for 80 billion cubic meters by 2020, which would be equivalent to about 85 percent of China's natural gas output in 2010, or account for about 8-12 percent in conventional gas production by 2020.

Just as shale gas production in the US has reduced its dependence on imports, China hopes that shale gas will play a leading role in the country making the most of its energy mix and curtailing its reliance on foreign imports. To that end, the government has made great efforts to lure more companies into finding and developing this unconventional energy source.

First, it reformed the pricing mechanism in two pilot provinces and let the market decide wholesale prices for unconventional gas, including shale gas. This has created a new incentive for companies to produce shale gas.

Second, China has unveiled some supportive measures for shale gas development. The National Energy Administration established a shale gas laboratory in Langfang, Hebei province, where the national shale gas research center is located. It also promised to increase investments and set up shale gas special funds to support shale gas discovery and evaluation, as well as relevant technologies on shale gas exploration and development.

In addition, the government is encouraging companies to increase investment in technological research and development by exempting shale gas resource taxes and granting financial subsidies.

Third, in December last year the government approved shale gas to be an independent mining resource, paving the way for Chinese private companies' entry into the sector, which previously was restricted only to State-owned enterprises.

At the end of last year, the National Development and Reform Commission and the Ministry of Commerce jointly published the Industries Guiding Catalog for Foreign Investment, which listed the exploration and development of shale gas in the "encouraged" category. Foreign companies, if they want to get access to China's shale gas industry, have to partner with Chinese enterprises. Nevertheless, Chinese companies are eager to work with their foreign counterparts since the latter have the technical expertise in extracting shale gas. Given China's huge reserves, foreign companies able to enter the Chinese market will potentially realize significant profits and gain an edge in coming in early.

In June last year the Ministry of Land and Resources conducted the first round of bidding for shale gas exploration rights, and the second round is to be held this year. Several joint projects are under way. For example, PetroChina and Royal Dutch Shell PLC clinched a deal in 2009 to jointly develop shale gas in the Fushun-Yongchuan block in Sichuan province, marking China's first joint development project in shale gas. A year ago CNPC and Total agreed to invest $2 billion (1.5 billion euros) in Inner Mongolia to develop unconventional gas. In January 2010 Sinopec and BP cooperated to develop a shale gas block in Guizhou.

Moreover, Chinese energy firms are proactive in going out to buy foreign shale gas assets. In 2010 Shell and PetroChina partnered to jointly acquire the Australian coal-seam gas developer Arrow Energy Ltd for $3.77 billion. Sinopec acquired one-third of the equity of Devon Energy Corp's five shale gas assets in the US for $2.2 billion.

This marks Sinopec's first foray into US shale gas resources. In December 2010 CNOOC bought a 33.3 percent interest in Chesapeake's Eagle Ford shale project in southern Texas.

CNOOC has also signed multibillion-dollar deals in the past two years with the most active US natural gas driller, Chesapeake Energy, to invest in shale blocks in Wyoming, Colorado and Texas.

In general, China still lags greatly behind developed countries in shale gas exploration and development. Although China is estimated to have by far the world's largest recoverable shale gas resources, commercial-scale production is still a way off. Despite the long-term promising prospects, in the short term China still needs to deal with some key challenges before shale gas can play a role. First and foremost is the lack of core technologies in shale gas assessment and development, making large-scale exploitation almost impossible.

Moreover, shale deposits in China are generally deeper and structurally more complex than those in the US, thus posing greater challenges and adding extra costs for production. Unlike marine shale in the US, shale rock in China is primarily non-marine, which not only means lower productivity, but also has much higher clay content and is more difficult to be fractured. It is said that in the US gas can mostly be found from two to six kilometers deep, whereas in China some key deposits are found six kilometers deep.

Second is the problem of water shortage. To extract gas from the shale, large volumes of water are needed to pump down the well and along horizontal drillings under pressure. This may affect the availability of water for other uses, and can affect aquatic habitats. In dry areas desperately short of water, tapping shale gas will be very expensive and challenging.

Third, chief among people's concerns is the likely environmental consequences. Hydraulic fracturing, or fracking, a method used to produce shale gas, requires injecting chemically treated water at high pressure so as to force the gas inside to seep out. Since fracking chemicals are hazardous, they can contaminate water from spills, leaks, faulty well construction or accidents. Moreover, fracking produces large amounts of wastewater and can cause natural gas to migrate into drinking water sources, thus seriously polluting underground waters.

Chen Shaofeng is an associate professor at the School of International Studies, Peking University; Zhu Qiang is a trainer at China Peace-Keeping Police Training Centre. The views do not necessarily reflect those of China Daily.