Energy-Hungry China Struggles To Join Shale-Gas Revolution
When Royal Dutch Shell PLC began a multibillion-dollar effort to tap China shale gas a few years ago, it seemed like a can’t-miss wager. China has the world’s most extensive shale gas reserves, biggest energy market, and a government pushing for expanded gas production.
But for Shell and its state-controlled partner, China National Petroleum Corp. the reality on the ground makes its bet look riskier.
The region’s rough terrain, poor infrastructure and deeply buried gas formations present tough technical challenges. The area is so densely populated and intensely farmed that drilling sites are being built within 360 feet of homes in villages like Maoba—upsetting residents who complain of noise, dust and environmental concerns. To ease the way, Shell and its partners are compensating local residents and local government officials for using their land and roads and other inconveniences.
Shell’s experience in China, where it is charging ahead faster than competitors, shows how replicating the U.S. shale boom won’t be easy. While other countries have shale gas—China, Argentina and Algeria have bigger reserves than the U.S., according to the U.S. Energy Information Administration—a range of obstacles make tapping those resources far tougher than in places like Texas and Pennsylvania.
Some shale-rich countries, including China, are short on developed roads, water and drilling contractors trained in modern safety standards. Others like France and Bulgaria have put up legal barriers to the hydraulic fracturing needed to extract shale gas.
And unlike in the U.S., where landowners generally own rights to gas beneath their property, minerals in many countries are owned by the state, giving residents little financial incentive to support drilling near their homes.
From May 2010—when Shell was conducting early exploration in the region—to March 2013, the company lost 535 days of work across 19 wells due to “spontaneous village based blockades” or government requests to halt operations, company officials said in a March paper delivered at an industry conference. Many of the villagers’ complaints stemmed from money disputes, the paper says.
Shell officials say the company is in the preliminary stages of its China shale project—it has only drilled about 30 wells—and it is too early to determine success or failure. They say drilling is on schedule, and that dealing with dense populations and difficult geology are the sorts of challenges energy companies often encounter when they move into new regions. Shell hasn’t released a cost estimate for the project, though the company said it is spending $1 billion a year on developing unconventional energy in China such as shale gas.
The rock itself in China is more difficult to extract gas from. There are high underground stresses, and Shell experienced some deformed well casings early in China drilling, according to a March paper published by Shell employees. “In general, you have to drill deeper” in China to reach shale gas, said Shell Chief Technology Officer Gerald Schotman.
Regulatory concerns also heighten China risks. The country hasn’t finalized fracking regulations. And to fight inflation, the government controls prices at which gas may be sold, which could weigh on profits.
Even so, China’s growing energy consumption, big reserves and a state push to replace coal power with cleaner gas make it an alluring target for big oil companies like Shell.
“Natural gas has the potential to spark an energy revolution similar to the one already under way in North America,” Shell Chief Executive Officer Peter Voser said during a speech last year in China at the Central Party School.
The Chinese government is backing shale development because it could lessen dependence on imported gas and polluting coal. China says it aims to raise natural gas to 8% of total energy consumption by 2015, up from about 4% in 2010. The government set an ambitious target to produce 6.5 billion cubic meters of shale gas annually by 2015, up from almost nothing last year.