BEIJING – In a remote corner of southwestern Sichuan Province, in an area of lush, terraced hillsides, oil exploration teams have been scaling cliffs to lay seismic charges and struggling to move heavy equipment along winding mountain roads.
That is where China hopes to find vast stores of natural gas trapped in shale rock. The U.S. Energy Information Administration has estimated that China’s technically recoverable shale gas resources could be 50 percent bigger than those in the United States, where shale has transformed the energy sector.
That has sparked hopes that unlocking those resources could help meet China’s relentlessly growing energy demand and ease its reliance on heavily polluting coal-fired power plants.
But progress on China’s shale frontier has been slow. About 60 shale exploration wells have been drilled over the past two years, according to the consulting firm IHS CERA, about as many as are drilled in North Dakota every 10 days. And there has been no Chinese shale gas production.
China’s shale gas deposits may be large, but they are remote, and in most places there is not enough water to provide for hydraulic fracturing, or fracking, a technique used to create cracks that unlock gas trapped in the rock.
More importantly, oil experts say, burrowing through China’s regulatory layers is no small feat. In the United States, independent oil companies bought mineral rights owned by private individuals, then pushed ahead with drilling and production. In China, lumbering state companies dominate the landscape, and mineral rights are owned by the state — although which state bureaucracy is in charge of regulation has been a matter of dispute.
“It’s not about the resource,” said an executive from one international oil company that has considered investing there, speaking on the condition of anonymity. “It’s about the above-the-ground factors.”
An executive from another international oil company, also speaking on the condition of anonymity, called the Chinese National Energy Administration’s goal of producing 6.5 billion cu. meters of shale gas a year by 2015 and almost 1 trillion cu. meters a year by 2020 “absolute fantasy.”
“There’s a lot of fantasy right now about the speed at which shale in China will scale. Almost none of the factors that allowed for ready expansion of shale in the U.S. are present in China — except, perhaps, the geology,” David Victor, director of the University of California at San Diego’s international law and regulation program, said in an e-mail. “It is the ‘above ground’ factors that matter often much more than geological factors below ground.”
China has never been a major natural gas producer or consumer. Natural gas provides just 4 percent of China’s total energy, compared with more than 25 percent in the United States, according to the Energy Information Administration.
Much of that gas is supplied to major cities such as Beijing, where it helps ease pollution by burning more cleanly than coal. With rapid urbanization expected to last another decade or more, demand for natural gas is heading higher.
“With accelerating urbanization, per capita energy demand will skyrocket in line with rising income,” Han Wenke and Yang Yufeng of China’s Energy Research Institute wrote in a recent paper. “The energy consumption mix for living will shift from low-end or primary energy (such as firewood in rural areas) to high quality energy (such as pipeline natural gas in cities).”
China’s 12th five-year plan aims to boost natural gas to 8 percent of national energy use by 2015. To get there, China plans a jump in imports as well as tapping domestic supplies of shale gas and coal-bed methane. It already imports liquefied natural gas from exporters such as Qatar, often paying steep prices linked to international oil prices. More LNG is on the way as projects in Australia and Southeast Asia expand.
Gas imports covered 5 percent of domestic needs in 2007; they account for 30 percent now, according to Zhou Xizhou, director of the consulting firm IHS CERA (China). Domestic production doubled during that time but did not keep pace with soaring demand.
China’s national oil companies have looked to the United States to learn the shale business. Sinopec paid $1 billion for properties owned by Chesapeake Energy. Earlier, CNOOC paid billions for a one-third interest in Chesapeake acreage. The Oklahoma-based firm was the leading U.S. shale gas company — until heavy debt and low gas prices battered its fortunes. In January, another Chinese company, Sinochem, spent $1.7 billion to buy a stake in a Texas shale field owned by Pioneer Natural Resources.
Those investments did not buy technology transfer, and Chinese companies still need U.S. know-how, despite a U.S.-China Shale Gas Resource Initiative in which the U.S. government tries to promote shale development in China, focusing on resource assessment and technology exchange.
Persuading global oil and gas companies to partner or invest in China is a challenge that illustrates some of the difficulties of doing business in modern China — and the uncertainties inherent in the oil and gas business.
A spat between two Chinese government bureaucracies muddled lines of authority. The National Development and Reform Commission, an arm of the powerful State Council, oversees oil, gas and other major economic issues. But the Ministry of Land and Resources oversees mineral resources and has claimed jurisdiction, arguing that shale is a mineral.
Royal Dutch Shell, the only company with a production-sharing agreement, signed its deal with PetroChina, an arm of the state-owned China National Petroleum Corp., in March 2012, and it is drilling its third well now, industry sources said. Dozens more will be needed to assess the area’s production potential.
Chevron, meanwhile, is operating in an advisory capacity while Sinopec’s people do the drilling and data collection. Both companies have successful production-sharing deals in Sichuan for what is known as tight gas, also difficult to extract.
Other companies are waiting until the regulatory line of authority is clarified.
For now, the Ministry of Land and Resources has the lead role. It has held two lease sales. The first round went to the two national oil companies, CNPC and Sinopec. In the second, however, not one of the winning bidders has any experience in the risky oil and gas exploration business. They included five electric utilities, five mining firms, an energy trading company and a city gas distributor. Only one of the companies is private.
Foreign companies, which were not allowed to participate, must now cut deals with these Chinese firms if they want access.
Pipeline infrastructure could present a bottleneck, too. The United States is crisscrossed with pipelines. In Pennsylvania, Texas and Louisiana, new shale gas production goes into a network developed over decades. China’s network is far less extensive.
That creates a chicken-and-egg problem, said one international oil executive. The Chinese pipeline company does not want to build a new pipeline without knowing whether there will be enough gas to justify it. The oil and gas exploration company cannot know that without drilling pilot wells, and before doing that, it wants a pipeline.
If companies move ahead, constructing drilling pads is also going to mean moving people, and many Chinese communities have been speaking out more than they did when hundreds of thousands were displaced by the Three Gorges Dam project in Hubei Province. “The habits of the past, when you could just bulldoze a village, are over,” said one oil executive.