China is set to miss its 2020 shale gas output target as it battles to reduce the costs of producing shale resources trapped in reservoirs more than 3500 metres underground.

By 2020, China’s shale gas production is expected to reach 17 billion cubic metres, up from last year’s 11 Bcm.

However, that total is well below the government's 30 Bcm target set for the end of the 13th five-year period running from 2016 to the end of 2020, acknowledged Guo Wei, a Resources Strategy Research Centre official at the Ministry of Natural Resources.

Guo was generally positive about China's shale gas exploration performance, with reserves increasing by 500 Bcm between 2016 and 2018 to reach 68.3% of the 730 Bcm target set for 2020.

Of the total new reserves discovered over the past three years, 156 Bcm was found at the PetroChina-operated Weiyuan shale gas play in Sichuan basin and 220 Bcm at the Fuling shale gas field operated by Sinopec, Guo said in a recent article.

The current spotlight for new shale gas reserves is the southern Sichuan basin, where PetroChina has made new discoveries with reserves totalling 32 Bcm, including 18 Bcm made since 2016.

However, to develop new shale reserves is both technically challenging and costly, which are the main reasons why China has been slow to convert the discoveries into production.

Guo said about 80% of the new discoveries are trapped in reservoirs beyond 3500 metres, which pose serious challenges for China to develop given the technical constraints.

He said that in recent years, China has managed to reduce the cost of drilling wells to depths of more than 3500 metres to about 50 million to 75 million yuan per well ($7.4 million to $11.2 million).

However, operators are still said to be finding it difficult to achieve internal rates of return of 8% on such wells. Guo said that most of China’s shale formations are deeper than 3500 metres and are more fractured than those elsewhere.

These unique features of the country’s shale geology lead to challenges in maintaining well integrity while drilling, which also helps to explain the exit of international oil and gas majors from China’s shale sector after poor results.

UK supermajor BP's chief executive Bod Dudley told Chinese media during the LNG2019 conference in Shanghai in early April that the complex geology at the Neijiang-Dazu and Rongchangbei blocks in Sichuan posed “great challenges” for the company.

In addition to complex geology and deep shale formations, low well productivity and infrastructure constraints are said to have eaten into the development economics.

The mountainous terrain in which some prospects are located also means that companies have to contend with high costs to build well pads and infrastructure and gas plants.

Some industry officials have suggested that China will need to offer more incentives to keep operators interested.

Currently, Sinopec and PetroChina rely on government subsidies to make their shale operations profitable.

The two companies are calling for an extension of existing subsidies for shale gas, which are due to end next year, until 2025.

The current subsidies are worth about $0.045 per cubic metre.

To keep current production from falling, Sinopec and PetroChina will have to drill hundreds of new wells to make up for production depletion in their fields, according to sources.

PetroChina owns and operates 11 shale gas exploration licences covering 51,000 square kilometres, of which 10 are located in the Sichuan basin.

In addition to shale gas prone blocks, Sinopec and PetroChina hold most of the country’s conventional gas blocks, some of which have overlapping unconventional gas reserves.

Weekly

High costs hinder China's shale gas drive