Fracking Abroad
Rare Good News for China’s Shale Ambitions

China has the world’s largest shale gas reserves, and it’s not really a close contest. The EIA estimates the unproved technically recoverable Chinese shale resource to be somewhere north of 1,115 trillion cubic feet of gas, nearly double that of the United States. But unfavorable geology, an under-built pipeline network, and a water scarcity problem have all conspired to keep most of those hydrocarbons in the ground. But even as China’s own oil majors are cutting higher-cost production, bowing to the headwinds of bearish crude and looking to trim their fattier operations, BP is looking to double down on Chinese shale investments. As the FT reports, the oil major just announced a new shale exploration deal with China National Petroleum Corporation (CNPC) in the province of Sichuan:

The latest BP contract with CNPC involves a block called Rong Chang Bei, adjoining the companies’ existing partnership in Neijiang-Dazu. CNPC will have operational control in both cases. Financial terms were not revealed.

BP’s investment promises to restore some confidence to the Chinese shale sector after recent setbacks. Complex geological challenges as well as increased economic hurdles caused by the fall in energy prices have damped hopes of a US-style shale boom in China. […]

Bureaucrats in Beijing see shale gas as a promising means of protecting Chinese energy security, and initially offered subsidies to get the industry off the ground. Those subsidies have been cut back as the oil and gas market has swung into oversupply over the past two years.

Beijing had the rotten luck to begin its shale journey just as the global oil market was crashing from its June 2014 high of more than $110 per barrel. Today, Brent crude is trading just above $45 per barrel, the result of a global glut that has stretched the operating budgets of oil majors and the national budgets of petrostates alike. Because so many natural gas prices are linked by contract to oil prices, this has had an effect on gas producers as well (not to mention the fact that there’s also a global glut of LNG at the moment).

But the natural world has been just as big a hurdle as market forces for China’s shale ambitions. China’s stratigraphy is more “crunched” than the relatively even-layered “wedding cake” geology of the United States, and that makes horizontal well-drilling a lot more difficult. China has also lacked the deep pool of investors willing to risk significant amounts of time and money on unproven projects—one of the key catalysts for the U.S. shale boom. In that context, BP’s new deal will be very welcome in Beijing.

The United States isn’t the only country with large reserves of tight oil and shale gas, but it is the only one really enjoying the benefits of those resources at the moment. China wants to play catch-up, but its stumbles remind us just how remarkable and—dare we say, unique—this U.S. shale revolution has been.

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