Beijing, 29 May 2014 – China will be able to meet its 2015 shale gas production targets, but at prices more than double those of the US’ biggest projects, according to analysis of one of the country’s first shale gas plays.

Research company Bloomberg New Energy Finance has examined data from the Fuling block of the Sichuan Basin, being drilled by state-owned firm Sinopec. Its analysis suggests that China has a good chance of hitting its shale gas production goal of 6.5Bcmpa[1] (480MMcfd[2]) by 2015, but that the current wellhead cost of $11.20/MMBtu[3] is far above equivalent costs in the US, where producers can extract dry gas for as low as $3.40/MMBtu.

Xiaolei Cao, analyst for China power, gas and carbon markets at Bloomberg New Energy Finance, said: “Reforms along the gas value chain, from upstream market entry to third-party access and to the city-gate pricing mechanism, are required to improve the economics of shale gas development but reform takes immense time and effort.”

“However although China’s shale gas production will not be a significant new source of supply by the end of next year, its price signal and potential volume could be significant in the global market as China could use it in negotiations for pipeline and liquefied natural gas (LNG) supply.”

Sinopec has made significant progress in reducing its costs at Fuling in the past two years. Average well costs have dropped from CNY 100m ($16m) in 2012 to CNY 70-80m ($11-13m) currently, and the company is targeting CNY 60m ($10m) in 2014. US prices are as much as 75% lower: $9.3m in the Haynesville, $6.0m in the Marcellus, $3.3m in the Barnett and $2.6m in the Fayetteville plays.

Nevertheless, Fuling block wellhead gas will still range as high as $21.10/MMBtu for wells producing only 2,000mcfd, and $11.20/MMBtu for wells producing 4,000mcfd. Sinopec plans to increase shale production from the Fuling block to 5Bcmpa (480MMcfd) and 10Bcmpa (970MMcfd) by 2015 and 2017, respectively. Bloomberg New Energy Finance estimates that in order to meet these targets, Sinopec needs to invest CNY 16.8-19.0bn ($2.7-3.1bn) on site preparation, drilling, completion and gathering activities.

Even with billions of dollars of additional spending, China’s shale gas plans will place it more than a decade behind the US’ shale gas production. China’s 2015 target is equal to US shale production in the late 1990s, and its 2020 target will still only equal US shale gas production in 2009.

At $11.20/MMBtu, Fuling shale gas costs are in between two key prices for Sinopec. The $400bn gas supply deal signed last week with Russia is likely to be higher per unit than Fuling shale gas, but Fuling costs are higher than the current tariffs that Sinopec receives for its shale gas. Today, Sinopec shale gas is sold at $8.10-10.00/MMBtu at the wellhead after deducting the transmission tariff to bring the gas to market and government subsidies. The exact price depends on the destination, as both city-gate prices and transmission tariffs are set on a province-by-province basis. Only under very aggressive initial production rates of 6,000mcfd would Fuling shale gas be economic at current tariffs. Boosting shale gas production will therefore require increased tariffs or higher subsidies.

If city-gate prices and transmission tariffs remain flat, the immediate solution to make shale development profitable would be to raise the subsidy from the current CNY 0.4/m3 ($2.30/MMBtu) to CNY 0.6-0.9/m3 ($3.50-5.40/MMBtu). Bloomberg New Energy Finance also suggests introducing a multiple-tier subsidy based on the different levels of city-gate prices and transmission tariffs of destination markets.

Charles Blanchard, head of gas for Bloomberg New Energy Finance, said: “We now expect China to hit its 2015 shale gas production target of 6.5Bcmpa (630MMcfd), which would account for around 3% of the country’s total gas consumption in that year. However, its 2020 target of 60-100Bcmpa still looks quite ambitious. Costs must continue to fall and greater competition, at least in the upstream, will be required.”

Milo Sjardin, head of Asia-Pacific for Bloomberg New Energy Finance, said: “Even though the current breakeven price is high relative to the US, it should go down with increased experience and is already substantially lower than the spot LNG price which rose as high as $18-19/MMBtu last winter. In addition, it is a domestic resource that will reduce China’s energy dependence and aid the country’s recently announced “war on pollution” so the recent success will likely result in further government support.”

[1] Billion cubic metres per annum

[2] Million cubic feet per day

[3] Million British thermal units



CONTACT:

Noemi Glickman
Bloomberg New Energy Finance
+44 791 957 1273
nglickman@bloomberg.net



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