China-Shale-Gas-Development-PIM-201308

Chi ’ Sh l G D l tChina’s Shale Gas Development  Briefing ‐August 2013Briefing  August 2013 Address: Building 1 Suite 1361, Jin Jiang Complex, 59 Mao Ming Nan Lu, Shanghai 200020 China Office Phone：86 21 5466 7100 Fax line：86 21 5466 7110 Email: tomward@pimchina.com Website: www. pimchina.com Table of contents • China Shale Gas Industry Overview • China Shale Gas Reserves • Shale Gas Development in China • Shale Gas Blocks Auctions • Regulatory & Policy Framework • Shale Gas Future Projectionj • Challenges  of Shale Gas Development in China  • Opportunities for Products and Service SuppliersOpportunities for Products and Service Suppliers 2© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. We believe that there significant opportunity for shale gas equipment and China Shale Gas Industry Overview We believe that there significant opportunity for shale gas equipment and expertise in China because: Significant Forecasted Growth Lack of local expertise and  equipment  AND 3© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. Source: PIM research and analysis Chi h l d l t it l t t t t China Shale Gas Industry Overview China sees shale gas development as its long-term strategy to overcome its high dependency on imported gas • Recently the US Energy Information Administration (EIA) has estimated that China’s shale gas recoverableRecently the US Energy Information Administration (EIA) has estimated that China s shale gas recoverable  reservoirs is around 31 tcm, putting China in the world’s first position • Natural gas produced from shale gas reservoirs is becoming increasingly important in China  – The country shifts from coal-based energy to cleaner energy sources: In 2011, 70.4% of China’s energy consumption came from coal, 17.7% from oil and only 4.5% came from natural gas – It is a long run strategy for China to reduce its dependency on imported gas resources: In the last three years, the national consumption for natural gas has far exceeded domestic production. In 2011, China domestic consumption of natural gas was 147 bcm and the production was only 107 bcm The gap of 40 bcm or 27%consumption of natural gas was 147 bcm, and the production was only 107 bcm. The gap of 40 bcm, or 27% of national consumption, was filled by importing. • In order to fill this gap, domestic production of natural gas, especially from unconventional resources such  as coal bed methane (CBM) tight and shale gas reservoirs must be increased dramatically The need toas coal bed methane (CBM), tight and shale gas reservoirs must be increased dramatically.  The need to  grow domestic output of unconventional gas production has been recognized both by the government and  private sectors, thus giving significant  impetus to the development of shale gas extraction Al h h Chi f l h ll d l ffi i h l i d l l• Although China faces several challenges to develop efficient shale gas extraction, and large scale  commercial production of shale gas has yet to begin,  the government is optimistic about China’s future  shale gas production. The Ministry of Land Resources has set aggressive targets of 6.5 bcm/yr by 2015 and  at least 60 bcm /yr by 2020. 4© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. To support the development of shale gas, the Chinese government has China Shale Gas Industry Overview pp p g , g facilitated opening up potential opportunities for related products and service suppliers • China has held two auctions to kick‐start the shale gas extraction development with over 20 shale gas  blocks being leased to 18 companies.  With the slow progress of the initial leaseholders, the third auction is  expected to take place in late 2013, or early 2014.  • Together with the auctions, the government also issued several related regulations and policies, including  production and infrastructure construction goals and subsidies to boost the development of shale gas • Domestic players, such as CNPC*, SINOPEC and Yanchang Petroleum, have established positive examples  for other shale gas block winners. Foreign players, such a Shell and Chevron, are also actively deploying  strategic efforts in China in cooperation  with domestic operators • China’s shale gas development process may present opportunities for domestic and foreign oilfield  products and service suppliers 5© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. Notes: CNPC: China National Petroleum Corporation Source: PIM research and analysis Table of contents • China Shale Gas Industry Overview • China Shale Gas Reserves • Shale Gas Development in China • Shale Gas Blocks Auctions • Regulatory & Policy Framework • Shale Gas Future Projectionj • Challenges  of Shale Gas Development in China  • Opportunities for Products and Service SuppliersOpportunities for Products and Service Suppliers 6© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. Based on the EIA estimates, China’s shale gas reserves ranks as the China Shale Gas Reserves_ China’s Shale Gas Resource Reserve in World’s Environment , g world’s largest with a total of technically recoverable reserves of 31.6 trillion cubic meters Top 10 countries with technically recoverable* shale gas resources (tcm)1 31.6  30.0  35.0  Top 10 countries with technically recoverable  shale gas resources (tcm) 22.7  20.0  18.8  16.2  15.4  20.0  25.0  12.4  11.0  8.1  6.9  5 0 10.0  15.0  0.0  5.0  China Argentina Algeria USA** Canada Mexico Australia South  Africa Russia Brazil Notes: *Technically recoverable resources represent the volumes of shale gas that could be produced with current technology, regardless of gas prices and   production costs ** Advanced Resources International (ARI)estimated that USA had 32.9 bcm technically recoverable shale gas resources 7© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. Source: : EIA, June, 2013, Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the  United States The majority of China’s shale reserves are in 3 basins – Sichuan, Tarim China Shale Gas Reserves_ Distributions j y , and Yangtze Platform, accounting for 89% of the estimated national reserves Size of Assessed Shale Gas Resources, at Basins 1,2 Basins Geological  reserves (tcm) Technically  recoverable  (tcm) Sichuan Basin 66.8 17.7 Tarim Basin 27.7 6.1 Yangtze 16.9 4.2Yangtze  Platform 16.9 4.2 Greater Subei 5.1 1.3 Junggar Basin 10.2 1gg Jianghan Basin 3.2 0.8 Songliao Basin 4.4 0.5 Source: 1. EIA, June, 2013, Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the       U it d St t • To date, the greatest interest has been focused on the Sichuan Basin  8© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. United States 2. EIA/ARI World Shale Gas and Shale Oil Resource Assessment , June, 2013 Table of contents • China Shale Gas Industry Overview • China Shale Gas Reserves • Shale Gas Development in China • Shale Gas Blocks Auctions • Regulatory & Policy Framework • Shale Gas Future Projectionj • Challenges  of Shale Gas Development in China  • Opportunities for Products and Service SuppliersOpportunities for Products and Service Suppliers 9© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. Th hi t f h l d l t i Chi i l ti l h t h Shale Gas Development in China_ Development On the Way The history of shale gas development in China is relatively short, however, the China government is now acutely focused on its importance • In 2008, CNPC drilled its first shale gas well , extracting some shale gas samples • In 2011, the State Council formally approved the shale gas as an independent mineral resource in China, from its  former status as a “natural resource”; a significant step towards opening shale gas development to competition  • In 2011, the first shale gas blocks auctions kicked off the development of shale gas in China. With the exploration  investment of 591 and 248 million RMB separately for shale gas, SINOPEC and Henan Coal Seam Gas Company won  the first round of shale gas exploration rights in Yuqian Nanchuan and Yuqian Xiangxiushan blocks separately.  • In 2012, China’s shale gas production reached 0.05bcm. In the same year, the National Energy Bureau issued the , g p y , gy 12th Five‐year Plan for shale gas, and set the 6.5 bcm production goal for 2015 • In 2012, the second shale gas blocks auctions kicked off the development of shale gas and 19 shale gas blocks went  to 16 companies without oil and gas exploration experiences. A total 2 billion USD was projected to be invested in  shale gas exploration • In 2013, China approved the first production‐sharing contract (PSC) in shale gas industry between CNPC and Shell  to tap Sichuan province's Fushun‐Yongchuan shale gas block  • By the end of February, 2013 , more than 70 billion RMB was put into shale gas exploration.By the end of February, 2013 , more than 70 billion RMB was put into shale gas exploration.  • In June, 2013, CNPC Southwest Oilfield Company started to construct China’s first dedicated shale gas pipeline in  Sichuan. The 92.8‐km pipeline will link gas wells in the Changning block to an existing gas line that leads to  neighboring Yunnan Province • By far cumulatively over 100 shale gas wells were drilled 10© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. Source: 1. PIM  research and analysis By far, cumulatively, over 100 shale gas wells were drilled Currently, high costs and low production led Chinese shale gas producers Shale Gas Development in China_ Current Situation Currently, high costs and low production led Chinese shale gas producers to lose money. State-of-the-art technologies that could reduce costs or improve the efficiency of development would be welcome in China • Output problems to date: below break even production• Output problems to date: below break‐even production  “…experts in the China shale gas circle generally agree that, the break‐even output for a horizontal shale  gas well in China is around 150,000 cm of gas per day…most horizontal shale gas wells in China produce  only several thousand, or several tens of thousand cm of shale gas. The output falls far short of the break‐ d l l ”even point, and nearly everyone is losing money.” – Qin Yong (秦勇), Vice‐president, China University of Mining and Technology “…the break‐even output for shale gas wells should be 100,000 cm per day…” Ӎ Pang Wei (庞伟) , Engineer specializing in horizontal well completion, SINOPEC Research Institute of  Petroleum Engineering • Cost of shale gas wells in Chinag “…the cost of a shale gas horizontal well in China is about 50 million RMB (8 million USD)…” – Mr Li Jingqun (李静群), Executive Vice President, Antonoil “ I Chi h f d illi h l i l ll i d 20 000 RMB (3 170 USD) d f“ In China, the cost of drilling a shale gas vertical well is around 20,000 RMB (3,170 USD) per meter, and for  a horizontal well, the cost is about 30,000 RMB/meter (4,755 USD). For a 2,000 meters deep and 1,000  meters long well, the cost is around 70 million RMB(11 million USD), which is much higher than the cost in  USA”  11© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. Source: PIM interview and analysis – An officer of Ministry of Land and Resources When compared to the USA, due to immature technologies and high costs, Shale Gas Development in China _ Comparison of China and USA p , g g , China’s shale gas development progress is negligible. China has a long way to go before realizing viable commercial production Shale gas development progress: Comparison of China and USA Items USA China The number of wells drilled (until  Over 100,000 Around 80 Shale gas development progress: Comparison of China and USA ( 2012) , Horizontal drilling technology mature immature Cost of horizontal drilling (million 4~11 8~12Cost of horizontal drilling (million  USD) 4 11 8 12 Production in 2012 (bcm) 287 0.05 Projected production in 2035 (bcm) 400 100Projected production in 2035 (bcm) 400 100 “Despite the fact that China’s National Energy Administration has set ambitious goals of producing 230 billion  cubic feet of shale gas annually by 2015 and at least 2 2 trillion cubic feet per year by 2020 the amountcubic feet of shale gas annually by 2015, and at least 2.2 trillion cubic feet per year by 2020, the amount  produced in China by the end of this decade will only be equal to about a quarter of America’s current  production” ‐ Forbes, June, 2013 12© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. Source: Shale Gas Exploration in China, Zhujie, Strategic Research Center for Oil & Gas, Ministry of Land and Resources, PIM interviews Table of contents • China Shale Gas Industry Overview • China Shale Gas Reserves • Shale Gas Development in China • Shale Gas Blocks Auctions • Regulatory & Policy Framework • Shale Gas Future Projectionj • Challenges  of Shale Gas Development in China  • Opportunities for Products and Service SuppliersOpportunities for Products and Service Suppliers 13© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. T h l bl k ti h b h ld t ki k t t th h l Shale Gas Blocks Auctions_ the First Auction Two shale gas blocks auctions have been held to kick-start the shale gas effort • The first auction of shale gas blocks was carried out in 2011, with only 6 SOEs permitted to  bid. MLR* awarded two blocks, one to SINOPEC and one to the Henan Coal Seam Gas  Development Group. The two blocks are located across Chongqing and Guizhou, with the area  of each block over 2 000 square kilometers The two winners planned to invest 590 and 248of each block over 2,000 square kilometers. The two winners planned to invest 590 and 248  million RMB separately over the next three years • However, energy planners appear dissatisfied with the pace of activities over the past twoHowever, energy planners appear dissatisfied with the pace of activities over the past two  years, and held a second auction in 2012 which was opened to a substantially wider group of  domestic investors; 19 blocks were granted to 16 organizations, none of whom were oil and  gas companies. Two of them are private companies “…existing gas producers have fallen behind schedule with their own work … the government probably sees a g g p f g p y different approach as the best way to reinvigorate the country’s domestic gas program…”   ‐Reuters, 3‐21‐13 14© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. * Notes: MLR refers to the Ministry of Land and Resources Unlike the first shale gas blocks auction, the second one was an Shale Gas Blocks Auctions_ the Second Auction g , relatively open tendering, and had attracted over 80 companies to compete for 19 blocks • Requirements for Bidders All companies satisfying the following requirements could bid• Requirements for Bidders: All companies satisfying the following requirements could bid: − Domestic companies with registered  capital of more than 300 million RMB − Have the Oil and Gas or Gas Mineral Exploration Certificate, or   have cooperated with  those who own either one of the certificatesthose who own either one of the certificates − Bidders should be independent legal entity. Joint bidding was not allowed • Measurements used for Performance Assessment• Measurements used for Performance Assessment − The validity of the exploration right is 3 years (2013~2015) − During the 3 years, the annual investment for the blocks should be at least 30,000RMB  per sq kmper sq.km − Drilling at least 2 wells per 500 sq.km − The bidders should make a written commitment to the Ministry of Land and Resources  (MLR) regarding the total investment that would made the number of wells that would(MLR) regarding the total investment that would made, the number of wells that would  be drilled, etc − If the  results are not as the winners promised after three years, the MLR would take  back the exploration rights from the winners 15© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. In the second auction, 19 shale gas blocks bids went to 16 companies Shale Gas Blocks Auctions_ the Second Auction , g p without upstream natural gas exploration/E&P experience in the second auction Winners of the December 2012 auction of shale blocks • The list of winners is  notable for the lack of oil  and gas experience Winners Ownership  Name of the  Blocks Size (sq km ） Depth of  resources  (meters) Projected  investment  in the next  3 years(mi.  RMB) • Several coal and power  companies – some of  significant scale – were  winners RMB) Tongren City Energy Investment  SOE Guizhou  Cengong 915 1,400‐ 1,500 465 Shenhua Geological Exploration SOE Hunan  Baojing 1,190 ‐ 874 winners • None of the big SOE oil  and gas companies were  winners: foreign Hunan Huasheng Energy Investment  and Development  SOE Hunan  Longshan 878 1,500‐ 4,000 398 Chongqing City Energy Investment  SOE Chongqing  Qianjiang 1,272 ‐ 1,735 Chongqing Mineral Resources  SOE Chongqing East  1 002 winners: foreign  companies were not  invited to participate  • To win the leases the gq g Development  SOE gq g Youyang 1,002 ‐ ‐ State Development Investment Corp SOE Chongqing  Chengkou 1,021 ‐ ‐ Henan Geological Exploration and  Mine Investment SOE Henan  Zhongmu 1,396 ‐ ‐ • To win the leases, the  16 companies committed  to spend approximately  US $ 2 billion over the  next 3 years on Mine Investment   Zhongmu Henan Geological Exploration and  Mine Investment   SOE Henan  Wenxian 1,378 ‐ ‐ Jiangxi Natural Gas Holdings  SOE Jiangxi Xiuwu  Basin 598 ‐ ‐ 16© 2013 PIM Ltd. All rights reserved. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from PIM Ltd. Source: Ministry of Land and Resources next 3 years on  development Anhui Energy Group  SOE Zhejiang  Linan 580 ‐ ‐ M t ti i t j ik i d d f ilfi ld i Shale Gas Auction_ the Sec