Most people think that China will develop its unconventional resources quickly with help from the major integrated oil and gas companies.

Most people think that China will develop its unconventional resources quickly with help from the major integrated oil and gas companies.

The pros and cons for developing shale resources in China range from solid government support on the pro side to geology of smaller basins being trickier than in the U.S. on the con side, said Dawei Zhang, deputy director, Oil & Gas Strategy Center, Ministry of Land and Resources (MLR).

Other pros include high natural gas demand, development of some exploration technology, interest of major coal and power companies to develop shale resources and lower labor and land costs, he explained.

On the con side, drilling is riskier, requiring deeper drilling and fewer commercially viable wells.  Advanced hydraulic-fracturing technology is needed.  Investment is tied to heavyweights, but there are fewer small players to develop different technologies.  Pipeline capacity must also be expanded, he added.

An international symposium on shale oil resources and exploitation technologies in Wuxi, China, on April 18-19 was sponsored by Sinopec.  Most of the 300 attendees were from state-owned enterprises. Thirty representatives outside China attended, including geologists from ExxonMobil and Chevron.  

Technical papers were presented by MLR, Sinopec, PetroChina, Chevron, several universities and research consultants. Some of the material in this report is from news stories researched after presentations were given.

Zhang explained seven provinces account for 70% of the shale resources. Onshore deposits of shale gas are located all over the country, and 180 areas of shale gas have now been identified by the MLR as priority development areas.

China will be in the “beginning stages” of production during the next five years. After that, China could be in the “take-off mode,” he continued.

Overview Of Shale Resource Evaluations In China

The NDRC recently announced a shale-gas production target of 6.5 billion cubic meters (Bcm) [229 billion cubic feet (Bcf) annually by 2015 and 100 Bcm (35.3 Tcf) annually by 2020.

China began to study shale resources in 2004, and several blocks were designated for development in 2009. At this time, only state-owned enterprises (SOEs) have the right to exploit shale resources.

The MLR launched a first round of bidding for the commercial development of shale gas in June 2011. Sinopec and PetroChina submitted satisfactory bids for two of the four blocks opened for tender and were granted operating licenses.

Although foreign energy companies were not allowed to directly participate in this round of bidding, these were allowed to form joint ventures and provide technology services to Chinese SOEs involved in the exploration and production of shale gas.

Tight Oil Targets In Eastern China

The latest assessments conducted by Chinese SOEs, universities and think tanks have concentrated on the lucstrine black shales of eastern China sedimentary basins. This makes sense as most of the population and economic activity takes place in this part of the country.

China has 300 billion barrels of tight oil recoverable reserves and that average production costs would run at roughly $50/barrel, claimed Chengzao Jia, PetroChina’s Research Institution of Petroleum Exploration and Development.  Tight oil mainly occurs in the lake basin deposit system in the Meso-Cenozoic.  Tight oil has already been economically produced in the Changqing oil field of the Ordos Basin.

Zhijun Jin, Sinopec Research Institute of Petroleum Exploration and Production, pointed out that four SOEs have progressed in exploring the shales since 2007. The area of exploration has been the lucustrine rift basins in eastern China through old well reperforation analysis and stage fracturing of vertical and horizontal wells.

The Chinese SOEs have drilled hundreds of thousands of wells during the past 55 years and have excellent data to find shales with excellent total organic carbon (TOC >2%) and vitranite reflectance (Ro > 1.0).  The data also helps identify kerogen type and display adequate thermal maturity levels. The shales are rich in natural fractures with overpressured locations. Thickness (isopach) has been measured from 30 to 100 m (99 to 330 ft). In total, eight favorable shale-oil exploration plays have been identified in eastern China alone.

Yangtze Platform

The Upper Ordovician and Lower Silurian black shales of the Yangtze Platform were compared to the hot shales in North Africa, noted Xu Chen of the Chinese Academy of Sciences.

The multistacked locations in the Lungmachi formation have are 5.0-m (16.5-ft) thick in the upper member while the lower member has a thickness of less than 100 m (330 ft).

The Cambrian shale in the Upper Yangtze Platform compares to the Georgian Basin of north Australia, stated Jiangqiang Tan, GFZ-German Research Center for Geosciences

Tarim Basin

The Cambrian-Ordovician black shale system in the Tarim Basin in western China’s Xinjiang Uyghur Autonomous Region is a primary gas target, according to Baojian Shen of Sinopec’s Key Laboratory for Petroleum Accumulation Mechanisms.

Jiyang Sub-Basin (Shandong)

Guoqi Song, Sinopec Shengli Oiilfield Co., provided an assessment of the Jiyang Sub-Basin. More than 300 wells have been drilled with 30 wells showing commercial oil and gas production.

Well Boyeping 1 was drilled into the shale specifically to provide first-hand data and the Boyeping 2 is being drilled. The wells are about 2.5 kilometers apart.

Bohai Bay Basin

There have been 110 vertical wells drilled in the Dongying Depression in Bohai Bay Basin and eight of them are commercially producing. Early assessments suggest that there is wet gas and condensate along with dry gas, explained Linye Zhang, Sinopec Shengli Oilfield Co.

The shale oil and gas potential of the Liaohe Sub-Basin, which is located in the northeastern Bohai Bay Basin, lies in an eastern depression with thickness of 1,000 m (3,300 ft) and western depression with thickness of 600 m (1,980 ft), emphasized Jinchuan Zhang, China’s University of Geosciences (Beijing).  The Shanhejie formation, which is a shale oil target, extends over both. Other formations -- Shanxi and Taiyuan -- are considered gas targets.

Biyang Depression

Exploration and production in the Biyang Depression focuses on the multilayered Hetaoyuan formation of lacustrine shale, said Xiang Chen, Sinopec Henan Oilfield Co.  Recently, the Biye HF1 well had a 15-stage frac. It is one of only two wells that have been horizontally drilled and hydraulically fractured. Generally speaking, there is oil in the north and gas in the south.

Songliao Basin

Zhiaqiang Feng, Sinopec International, noted the oil- and gas-bearing Upper Crecteceous Qingashankou formation (K2Qn1), Lower Crecteceous Fuyu and Yangdachengzi formations in the Songliao Basin have extensive data from conventional production history.

The K2Qn1 formation has black shales with thickness of 100 to 350 m (330 to 1,155 ft) and can widen up to 500 m (1,650 ft) in places. More oil is in the western part of the formation.

Next Five Years

Although China still has plans to build several natural gas pipelines from Russia and the “-stans,” these pipelines will converge in northwestern China where recent cultural disputes have caused social unrest. Therefore, the development of shale gas in more culturally centric Chinese provinces is a “necessary redundancy” to augment or offset natural gas imports.

The MLR has announced that a larger number of investors will be invited to participate in the development of shale gas resources in China. Many large foreign oil companies are indeed willing to leverage technology and know-how to gain access to the Chinese shale gas and oil markets.  These companies will likely participate in the second round of bidding that should take place by the end of 2012 (20 blocks in 10 regions will be involved).

However, the Chinese government has not indicated if foreign energy companies will be allowed to participate directly in this second round, and, if so, whether these will be allowed to hold majority ownership and/or act as operators of shale gas blocks.

The biggest issue that came out in the conference is the lack of knowledge, technology and equipment for oilfield service companies.

To fracture one well, it usually takes all the regional oilfield service companies that operate under PetroChina and Sinopec to pull together equipment from all over the basin. Hence, it is rumored that Sinopec and PetroChina are looking to acquire a mid-size oilfield service company involved with hydro-facture experience and technology patents.

Midstream infrastructure will also be needed to move the volumes of oil, gas, condensate and NGL. This constraint, however, is considered secondary to getting the hydrocarbons out of the ground.

Finally, China will need to eventually adjust its natural gas price, which is close to $2/MMBtu. Although this doesn’t appear to be a big obstacle, market-based energy prices will need to be addressed soon rather than later.

Editor’s Note: Michael Warren was a panel member during the symposium and shared in this column his notes and some of his observations about the development of shale resources in China.