China Will Need American Shale

    Anthony Fensom

    economy, Americas

    U.S. Dollar and China Yuan notes are seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration

    For the Trump administration, the prospect of erasing a large amount of the U.S. trade deficit with China while also supporting a thriving domestic industry could prove a tempting deal.

    China’s shale gas production is picking up speed as it seeks to capitalise on the world’s highest estimated shale reserves. However, the communist-ruled nation is far from following in the footsteps of America’s shale boom, with analysts predicting China will miss its 2020 output targets by a wide margin.

    Nevertheless, China’s progress toward unlocking its shale gas reserves was highlighted by an April 17 report by the consultancy Wood Mackenzie. The report said China’s shale industry reached nearly 600 wells and nine billion cubic meters (bcm) of production in 2017, with output expected to nearly double to seventeen bcm by 2020.

    In addition, almost 700 new wells are expected to come onstream by the end of the decade from three new projects in the southwestern Sichuan Basin, with total capital investment of $ 5.5 billion.

    Yet despite its progress, China is predicted to miss its 2020 target of 30 bcm. That failure was announced in its thirteenth energy sector five-year plan, which said the mark would be missed “by a considerable margin,” resulting in an estimated thirteen bcm supply gap.

    In comparison, U.S. drillers produced 474.6 bcm of natural gas from shale in 2017 alone.

    “China is eager to materialize its shale gas potential to fuel its massive gasification initiative and support rising demand growth,” Wood Mackenzie’s Tingyun Yang said.

    “To meet the government’s thirty bcm target, up to 725 additional wells are needed by 2020 on top of the nearly 700 new wells. This will double the amount of investment needed in the base-case drilling plan. The required well number could be larger if well productivity degrades. This is a mammoth task for the Chinese NOCs (national oil companies).”

    “The scale of the estimated investment required could reach $ 12 billion and up to 1,400 new shale wells by 2020,” Wood Mackenzie elaborated.

    Chinese NOCs have succeeded in slashing costs by improving drilling techniques, along with improved geological understanding and technical experience. Wood Mackenzie estimates this has resulted in a forty percent cost reduction for exploration wells compared to 2010 levels, and a twenty five percent drop for commercial wells compared to 2014.

    However, China’s production costs remain far higher than in the United States, which built its shale revolution on competitive and open markets, active small explorers, developed infrastructure and readily available expertise.

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