More than a dozen Chinese independents have halted exploration and development investment in the country’s shale gas reserves as high costs and a lack of confidence in making commercial finds takes its toll, writes Xu Yihe.

Industry officials said about 65% of the 18 companies that won licences to explore 22 shale blocks in the country’s 2011 and 2012 licensing rounds have surrendered acreage to the Ministry of Natural Resources (MNR).

The other licensees, of which there are about five, have seen the size of their acreage reduced, based on the investment so far made.

Officials added that none of the 18 companies have fulfilled the investment commitments made in their bids.

“Exploration by the independents has lost momentum,” said one official with direct knowledge of China’s shale gas sector.

He said that when such companies decided to venture into shale gas E&P eight years ago, they underestimated the complexity and risks involved in tapping the unconventional resources.

However, officials admitted that part of reason for some independents backing out was a lack of useful data on acreage they were exploring, giving them few clues on reservoir prospectivity.

One official at state player China National Petroleum Corporation (CNPC) recently said at an industry conference that it will be a challenge for small and non-oil and gas independents to play a role in shale gas development in China, in part due to the heavy investment required and the geological complexity.

Officials declined to name the companies that decided to withdraw from shale investment, but said a few, including Huaying Group, Henan Yukuang Geological Exploration Investment and power utility China Huadian Corporation, are still pursuing efforts to drill more horizontal wells having had their licences extended.

The lack of any commercial discoveries to date by independents has also led the Chinese government to develop a new licensing policy delegating such powers to local authorities.

However, they added that, when offering shale blocks, local authorities will more likely approach a local E&P outfit owned by national oil companies such as CNPC and Sinopec rather than inviting bids from independents.

“Backed by their parents, local E&P outfits of national oil companies are both financially and technically competent to fulfill their exploration commitments,” said a second official.

Sources said provincial authorities in central China’s Hubei province will very likely offer acreage in Yichang city to Sinopec’s Hubei subsidiary Jianghan Oilfield Company instead of offering it through a tender procedure.

The acreage lies in western Hubei where, early this year, the MNR's China Geological Survey discovered 11.68 trillion cubic metres of shale gas in place — a size the MNR assumes will be big enough to produce 10 billion cubic metres per annum.

The discovery well, located 20 kilometres south-west of Yichang and drilled by Sinopec Jianghan Oilfield, hit 86 metres of pay and flowed 123,880 cubic metres per day of gas after fracking.

The MNR has so far licensed 54 shale gas blocks covering 170,000 square kilometres to national oil companies and independents.

Of the total, 32 were considered blocks with conventional gas, but were redesignated as shale gas blocks following discoveries.

The remaining 22 blocks were earmarked for offering in two licensing rounds.

Of the 18 companies offered these blocks, the only shale gas find was at Sinopec's Chuannan block, which was awarded in 2011.

Weekly

High costs and lack of finds take toll on independents