China looks to shale gas industry as companies halt exploration,CanCham上海加拿大商会微信公众号文章

With hopes of a U.S.-style shale gas boom sputtering, Chinese officials are faulting their own government’s management and proposing new experimental zones as a way to spur a new drilling rush.

China drilled its first shale gas well in 2010, its ambitions stoked by reports that its rocks held the largest such resource on Earth.

But the promised wealth of shale gas has not materialized, and the past two years have seen national targets cut several times – even the 2015 goal may now be out of reach, officials say – as both foreign and domestic companies halted exploration work and land goes left undrilled.

The most prospective shale gas regions of China’s southern Sichuan Basin occupy roughly 25,000 square kilometres.

“However, right now we are only working on several hundred square kilometres,” said Zhang Dawei, a director and researcher at the Mineral Reserve Review Centre in China’s Ministry of Land and Resources.

If the country wants to see more activity, it needs to consider “revolutionary action,” Mr. Zhang said Monday at a shale gas conference in Shanghai, echoing calls from President Xi Jinping for a Chinese “energy revolution.”

Mr. Zhang is calling for the creation of special demonstration zones for shale gas exploration and development that would newly expand the land available for drilling, and provide new openings for private investment in Chinese energy resources – an opening for Canada, too, as Alberta seeks new technology ties with China.

China has regularly used special zones to spark change, and the country is today littered with hundreds of places dedicated to promoting advances in agriculture, high technology and other priorities. The most famous experiments have taken root in places like Shenzhen, which helped building the foundation for China’s modern-day economic opening up. More recently, free-trade zones in Shanghai, Tianjin and elsewhere have been used to try out new ways of attracting foreign investment.

Shale gas demonstration zones could follow in that pattern to create space for “market-oriented” activity that would include, for example, obliging companies to return land they are not developing, Mr. Zhang said. A new shale gas approach could start in 2017, he said.

The idea is not, however, entirely new. China initially created several “shale gas demonstration areas” in 2011 and offered rich subsidies that helped lay the initial foundations for new kinds of energy extraction. But two subsequent land auctions have seen only partial success: The second, in late 2012, attracted only one company with experience drilling oil and gas wells, and little actual subsequent work.

Beijing is now paring back the subsidies – a move industry has opposed – while foreign and domestic companies have spent recent months suspending Chinese shale gas work. China National Offshore Oil Corp. stepped away from a project in Anhui province in March. In July, ConocoPhillips said it had halted all shale gas projects in China. Royal Dutch Shell PLC has said its shale exploration has shown “mixed results.”

China had set 6.5 billion cubic metres per day of shale gas as its target for 2015. But on Monday, Zhang Yousheng, a director and researcher with China’s powerful National Development and Reform Commission, said “we are facing some challenges and difficulties which could be obstacles for us to reach the target.”

Weakening demand is one problem. Chinese gas growth is up just 2.8 per cent in 2015, while liquefied natural gas imports actually fell earlier this year. In June, energy consultancy Wood Mackenzie cut its Chinese 2020-2030 gas demand forecast by 13 per cent. The broader Chinese economic slowdown has played a part in tempering gas demand. But “the distortion of government and policy” is another important factor, said Yang Lei, deputy director of the oil and gas department with China’s National Energy Administration.

He pointed in part to continued government price controls on natural gas. China needs “market-oriented prices,” he said.

Natural gas offers one of the best ways for China to both diminish carbon emissions and clean up smoggy air. But the country has repeatedly delayed plans for a third shale gas auction, raising doubts about its ability to settle on new and better ways to structure investment. Mr. Yang nonetheless offered hope. “I think in the future, more parcels would be available,” he said. “I see great potential in the shale gas industry, but we are confronted with a lot of challenges.”

For new demonstration zones to work, however, China will need to offer up more prospective ground in better locations – and more latitude to private investors, said Joan Lu, the vice-president of Energy China Forum who spent two decades working in energy finance. It’s not clear how much that can happen, given the power of entrenched interests, both in state-owned energy companies and the coal sector, with which natural gas competes as an energy source.

But the stakes are high, Ms. Lu said, since a more open shale gas sector can serve as a template for broader resource industry reforms. “You have to allow international companies to come in to be able to operate,” she said. “Because that’s one way to bring in the technology, bring in the right way of management.”

Canada, meanwhile, has begun to position itself as a partner in solving China’s shale problems.

On Tuesday, the University of Calgary will announce the creation of five new training courses at the Beijing site of its Global Research Initiative in Unconventional Hydrocarbon Resources. The Beijing facility has already been used for research work. It will in future be used to teach advanced-level courses on tight rock and hydraulic fracturing, in addition to a series of heavy oil and oil sands extraction techniques. Canada has decades of experience in pursuing difficult oil and gas projects, and has much to offer in this field, said Zhangxing Chen, the director of the initiative.

“The fundamentals are much more advanced in North America,” he said.

At the same time, Alberta is offering itself as a partner in developing China’s shale gas. On Monday, Alberta Energy Minister Margaret McCuaig-Boyd cited common objectives with Beijing, including reducing air pollution, moving away from coal-fired electricity, cutting greenhouse gases and developing unconventional energy resources.

“When you are considering the ideal place to pioneer new shale gas technologies, new processes and new equipment, pioneer in Alberta,” she told an audience that included government officials and executives from state-owned energy giants. “When you want to learn new ways to extract extremely hard-to-access resources, learn in Alberta.”