Thoughts on Policies to Promote the Development of Shale Gas Industry in China

POLICIES and LAWSThoughts on Policies to Promote theDevelopment of Shale Gas Industry in ChinaPan JipingStrategic Research Center for Oil Gas Resources, Ministry of Land and ResourcesIn recent years, global economy has been sluggish gas prices and increasing shale gas production. Laterand experienced slow recovery, while global shale gas faced by financial crisis and sluggish economy, shale gasdevelopment has been keeping a rapid growth with development was not impacted though. On the contraryincreasing investment, hot exploration and production shale gas development in the US overcome the difficultiesand continuously growing production. The preliminary and gained continuous developmentwork of shale gas development in China goes smoothly According to the assessment(EIA,2011).thewith the hot activities in resources survey and assessment, technologically recoverable resources of shale gas in theexploration rights bidding and exploration. The central US is 24.4 trillion cubic meters, 20 trillion cubic metersgovernment, local governments and private enterprises more than it was five years ago(ARI, 2006). Accordingare all keen on investment in shale gas development. to statistics, proved reserve of shale gas in the US wasHowever, we have to pay close attention to challenges and less than 500 billion cubic meters in 2005. In 2009. it wasdifficulties in developing shale gas in China1, 720 billion cubic meters and in 2011 it increased to 3, 000Current situation of shale gas development than it was 6 years before with an annual growth rate ofabroadapproximately 35%. With the rapid growth of reserve, theShale gas exploration and development have production of shale gas in the US exploded in the nextexperienced rapid growth in recent years all over the 6 years, from 19.6 billion cubic meters in 2005 to 28.3world, which has an increasing influence on global energy billion cubic meters in 2006, 138.7 b billion cubic meterspattern. On one hand, shale gas development in the US in 2010 and 172 billion cubic meters in 2011. with anaccelerates with growing investments and hot drilling annual growth rate of 43. 3%. The proportion of shale gasactivities. The reserves and production of shale gas in in total natural gas production of US increased from 4%the US grow fast and constantly, which helps US move to 25%. It is worth noting that, since 2011, with naturaloward a future of energy independence. On the other gas prices continued to fall, the U.S. shale resourcehand, other countries are more and more interested in development turned to focus on the development of shaleshale gas. Countries such as China, India, Poland and oil from shale gasGermany learn from US and actively develop and utilize Data show that there were only 23 companiestheir own shale gas resources. Shale gas has been the engaged in shale gas development in the US with 30,000important field and development tendency of global oil/ production wellsof less thagas exploration and production10 billion dollars中国煤化工Since 2005, powered by technology progress and companies withTHaCNMH Investmentmarket demand, shale gas development in the US has of more than 100 billion US dollars. In 2011, there werebeen growing rapidly with lower costs, lower natural more than 120,000 production wells. It is noticed thatCHINA OIL&GAS23No.4,2012POLICIES and LAWSe The Changning H2 well group is located in Yibing City of Sichuan Province. Similar wells had beent drilled to speed up shale gas exploration andvelopment after the well 201-HI yielded the highest gas flow without any foreign helpmajor energy companies entered into the field of shale ConocoPhillips, are developing shale gas in Polandgas development in the US through block and company 15 wells have been drilled and it is expected to haveacquisition. According to statistics, in the past five years, industrial production in next five years. In Germany,theremajors invested 72 billion US dollars farming into shale are hot activities of developing unconventional naturalgas development by assets acquisition. Taking the third gas. While actively boosting the development of coal-quarter of 2011 as an example, M&A deals related to shale bed methane(CBM), Germany vigorously advances shalegas totaled 22. 6 billion US dollars, up by 135% than the gas development. Dozens of exploration and productionprevious year. In another case, Exxon Mobil bought XTo licenses have been issued and dozens of wells completedfor 40.4 billion US dollars and acquired shale gas blocks Early-stage drilling and research of shale gas haveof4,200km2been carried out in countries such as Netherlands, Italy,It is estimated that in the coming ten to twenty years Denmark, Czech and Austria. What's more. australiashale gas development in the US will keep growing has drilled the first well for shale gas exploration andrapidly with increasing reserves and production. It will productionhelp US gain energy independency and enhance energysecurity. It is expected that by 2035, the production of Progress in shale gas development in Chinashale gas in the US will reach 325 billion cubic metersIn the past two years, government agencies includingaccounting for 45% of total natural gas production. By the Ministry of Land and Resources (MLR)and thethen,US will have to import only 1% of its natural gas National Energy Administration(NEA) promoted shaleconsumptionInspired by the success of shale gas development in the and assessment, resource management, industry planningUS, China, India, Australia and some European countries and r&D. Oillhave been actively engaged in developing shale gas Petroleum Cori中国煤化工 na Nationalresources in their own countries. In the past two years, Corporation(SiLLMCNMHGOCnemICEIvauvuaI OffShore OilPoland issued 58 shale gas exploration and production Corporation(Cnooc)are directly engaged in shale gaslicenses. More than 30 oil companies, including exploration and production from exploration, production方方数据《APOLICIES and LAWSand R&D. Local governments, private enterprises and with 6.5 billion cubic meters of production in Chinaforeign companies are also enthusiastic about developing Currently, government agencies concerned are activelyshale gasdoing research on unconventional gas developmentpolicies to encourage shale gas development and promoteWork of government agenciesthe great-leap-forward development of shale gas. In theIn 2011, MLR organized and carried out national same year, the project named Key Technologies on Shaleresource survey and assessment of shale gas and the Gas Exploration and Development was incorporatedscreening of favorable plays. It preliminarily assessed into national key sci-tech project named Developmentcontinental shale gas resource potential, initially screened of Large Oil/ Gas Fields and Coal-bed Methane to solvefavorable plays and perspective plays and made efforts to the essential technology problems related to shale gasanswer the questions of shale gas resource potential and exploration and development in Chinadistribution. So far, the work has gained certain resultsstating that the shale gas in-place resources in China Work done by Companies(except the Tibetan Plateau and offshore areas)is 134 In recent years, exploration of shale gas by oitrillion cubic meters with technologically recoverable companies has been focused on Sichuan Basin and itsresources of 25 trillion cubic meters. 180 shale gas periphery, Ordos Basin and eastern depressions of Liaohefavorable plays are also screened out. According to the Basin. By end of 2011, oil companies have acquiredresults, the recoverable reserves of shale gas in China will nearly 10,000 km of 2D seismic data, completed 60be 200 billion cubic meters in 2015 and 20,000 billion shale gas exploration wells, obtained industrial flows incubic meters in 2020. In the same year, NEA, the Chinese 27 fractured wells and preliminarily mastered fracturingAcademy of Engineering(CAE) and some oil companies technology for shale gas development. Among themresource potential and came up with 12-45 trillion cubic shale gas wells pec completed and fractured 15 horizontaland universities did a pilot study on national shale gas CNPC and Sinemeters of technologically recoverable resources in ChinaCNPC screened out four favorable blocks( WeiyuanIn 2011, MLR made innovations of oil/gas resource Changning, Zhaotong and Fushun-Yongchuan) inmanagement, introduced competitive mechanisms and southern Sichuan province and northern Yunan andlaunched the first round of shale gas exploration rights Guizhou provinces. Targeted at the Lower Paleozoicbidding. Four shale gas exploration licenses were issued marine shales, CNPC has completed over 10 shale gaswith a total area of 11, 000 km. These licensed blocks exploration wells of which 7 wells got industrial flowsare mainly located in Guizhou province and Chongqing The most productive vertical wells can produce 12,000municipality. This round of shale gas exploration rights cubic meters of gas per day, while the most productivebidding indicates that the first market-oriented trial of horizontal wells can produce 130,000--150.000 cubicoil/gas mining rights is a success and a milestone of meters of gas per day. Sinopec has completed over tenthe market-oriented reform of oil/gas mining rights. In wells in southeastern Guizhou province, southeasternthe same year, MLR implemented the verification and Chongqing municipality, western Hubei provincereporting of shale gas as a new type of minerals. The State central Hunan province, northeastern Sichuan province.Council approved and declared shale gas a new type of Biyang depression, Jianghan oilfield and southern Anhuiminerals, making shale gas the 172nd type of mineral province. 7 wells of them got industrial flows. Cnooc didresources in China. Currently, MLR is drafting regulations some first-step work of shale gas exploration in Wuhuand policies of shale gas resources. In the end of 2011, Anhui province, drilled shallow wells for geology andMLR initiated the National Exploration Development acquired 2D seismic data In Yan'an, Shaanxi provincePlanning and shale gas survey and assessment was listed targeted at continental facies muddy shales in the Upperas one of the important tasksTriassic Yanchang Formation, Yanchang Petroleum drilledTo promote the development of shale gas industry, five exploration wells and found significant discoveriesNEA, MLR and the Ministry of Finance jointly released of continental facies shale gas with 2,000 cubic metersthe 12th Five-Year Plan of Shale Gas Development in of test flows in2011(the Plan). The Plan defines the development goal United CBM putof China's shale gas development and utilization in the Shouyang, QinyI中国煤化工ble plays inCNMHGhui basic infuture: by the end of 2015, there will be 200 billion cubic Shanxi province. By end of 2011, Chinese oil companiesneters of measured recoverable resources of shale gas have made shale gas breakthroughs in marine, continentalCHINA OIL GASPOLICIES and LAWSand transitional faciesdifficulties. But the survey and assessment, explorationMeanwhile, it is noticed that some energy companies and production are all at early stages with limited timeot specialized in oil gas and private companies are keen and underinvestment. There are various versions ofon engaged in shale gas development. Universities and China's shale gas resource potential, lacking of authorizedresearch institutions are actively doing basic research and and unified data which meet the practices of shale gasR&d on shale gas developmentexploration and production. Although some governmentagencies, oil companies and universities estimated shaleInternational cooperationsgas resource potential in China and stated that the shaleUnder the framework of shale gas co-operation, gas in-place were 30-166 trillion cubic meters withChina and US jointly carried out the shale gas resource technologically recoverable resources of 12-45 trillionassessment project in the eastern depression, Liaohe cubic meters, there are not enough practical data withBasin. According to experts from US Geological Survey the lack of key parameters such as gas compositions and(USGS), there were mainly tight gas and CBM and no content, leading to rough resource potential estimates. Inshale gas in the Carboniferous-Permian of the eastern short, this is a question that requires long time and lot ofdepression, Liaohe Basin. Domestic oil companies are work to answer. The understanding of China's shale gasactively working with foreign counterparts in shale resources is a long processgas development through joint development, technicalservices,joint study, joint ventures, etc. CNPC signed a Lack of key technologies restrains exploration andjoint assessment agreement with Shell for the Fushun- development of shale gasYongchuan block. It also launched joint study programs The other bottleneck which restrains shale gaswith Statoil, Exxon Mobil and ConocoPhillips. Sinopec development is the lack of key technologies. After yearspartnered with BP and Chevron to develop the Kaili and of research and technological preparation, coupled withLongli blocks. Cnooc acquired shale gas assets in the years of experiences in developing tight gas and CBM,US through deals with Chesapeake Energy, buying one China has now preliminarily mastered some technologiesthird interests in the Eagle Ford shale oil and gas blocks, for shale gas development such as 8-20 stages fracturingsouthern Texas for 1.08 billion dollars and one third and long-distance horizontal drilling. But theseinterests in shale gas blocks, in northeastern Colorado and technologies are far from the need of shale gas explorationPink River Basin and Denver Basin, Wyomingand development. Compared with US, China has morecomplex geological conditions for shale gas such as strorMajor difficulties in developing shale gas in later tectonic movements, poor conservation conditionsChinaand complex generation and accumulation patterns. WeAccording to the preliminary national assessment of are still lack of key technologies related to shale gasshale gas resource, China has great potential in developing resource assessment methods, measuring of gas contentshale gas. However, there are many difficulties: lagging in shale, drilling and completion of horizontal wells andbehind the US; complex geological conditions; high long-distance multi-stage fracturing. These problemsrequirements for technology; problems to overcome in severely restrain shale gas exploration and productionexploration and productionaffect the understanding of shale gas resource potentialand have influences on the confidence of developing shaleShale gas resource potential needs further survey gasand assessmentPreliminary assessment of national shale gas resources Shale gas resource management needs to benows that China has great potential in developing shale enhanced and improvedgas. But we start later and lag behind the US with complex Shale gas as a new type of minerals has beergeological conditions, high technology requirements and acknowledged by the State Council. The first round ofgreat difficulties in exploration and productionshale gas exploration rights was launched and the secondShale gas resource potential is a fundamental and round is beenvant poliessential problem for shale gas development and and regulationVT凵中国煤化工CNMHGluding shaleindustry development. Shale gas in China is featured gas mining rigeserve reviewby various types and layers, complex geology and great and exploration and production regulation. EspeciallyPOLICIES and LAWSthe mining rights bidding rulesand relevant regulations limit thehealthy development of shale gasexploration and developmentIt is not good for efficient andreasonable development andutilization of shale gas resourcesor the development of shale gasindustry. The lack of shale gasresource management Institutionsand policies lead to the concern thatthere is no institutional planning forshale gas exploration rights biddingWhen the shale gas exploration anddevelopment is open to everyonethere will be illegal productionoperations which are contradictoryto geological patterns, Then therewill be disordered market and wasteof resources. The lack of resource management system large-scale developmentis another key problem for the shale gas production andindustry development. It is urgent to solve the problem Problems related to environmental protection are notsince China is about to explore and develop its shale gas attached to great importanceIn the US, environmental protection problems relatedto shale gas development have emerged which attractLack of favorable policies supporting shale gas great attention from various levels. Although shale gasindustry developmentdevelopment in China is still at its early stage, soonerReferring to international experiences and practices, or later we will face environmental problems especiallygovernments often release favorable and supporting the problem of water which is a big problem in droughtincentives to help the high risk, big investment and high hit northwestern China. What's more, we still in greattechnology unconventional resource development at their shortage of infrastructures which promote developmentearly stages. Currently, the government released a series and utilization of shale gas and CBM. On one hand, thereof favorable policies regarding tertiary recovery and the are insufficient gas transmission pipelines while operatingdevelopment and utilization of deepwater oil, heavy oil pipelines are exclusive and in lack of fair admissionand CBM, but there are no policies which encourage and system and regulation. On the other hand, gas pricingsupport the development and use of shale gas. In recent system is not reasonable with lower gas prices. It isyears,government agencies have done some research temporary for shale gas to go to local markets with goingon policies that promote shale gas development. It is gas pricespointed out that China should learn from internationalexperiences, refer to domestic policies on CBM and Thoughts on policies and suggestionslow-grade resources development and issue supporting Strengthen geological survey and study on shale gaspolicies for shale gas development including reduction to confirm resource potentialof resource taxes, fiscal subsidies and import taxes The first problem that constrains shale gas developmentreduction on key equipment. However, these policiesin China is that the resource base is still unclear If theare still in consideration and have not been released. resource potential is undefined, there will be no industrialNotably, exploratory incentives on promoting shaleproduction and il中国煤化工ore, Chinagas development pilots are still at blank. Under current should strengthenCN MHGt and basicmarket condition and pricing system, we need early-stage research on national shale gas resources to confirm theIncentivesto promote pilot development and industrial resource potential now and in the future. We suggest thatCHINA OIL GASNo.4,2012POLICIES and LAWSa national shale gas geological survey and assessment should develop engineering technologies and equipmentproject be incorporated in the National Exploration on shale gas production to form integrated engineeringDevelopment Planning. US took dozens of years to solve technology system especially long-distance horizontalthe shale gas resource problem including volume and well drilling technology and multi-stage fracturingdistribution characteristics to lay a solid foundation of the technologyrapid development of shale gas in the past ten years. Torealize the great-leap-forward of shale gas development Release early-stage incentive policies to cultivate andin China, we suggest the government should fund more develop shale gas industryto carry out national geological survey and basic research It is shown that in the early stage of a new industryon shale gas. Only by doing this, can we accelerate rapid supportive policies and incentives is urgently neededndustrial development of shale gasNow and in the future, the government should releasesome incentives and favorable policies to cultivate andAdvance management reform to safeguard shale gas development the shale gas industry. First, the governmentdevelopmentshould reduce or exempt shale gas resource taxes and feesAs a kind of unconventional resources, shale gas including resource taxes, mineral resources compensationneeds unconventional management system to promote its fees and loyalty. Second, the government should considerdevelopment and utilization. We should further reform on reducing part of the import tariffs on key equipment usedexisting oil/gas resource management system, improve to explore and produce shale gas For R&D investmentregulations to provide favorable institutional environment on key technology, the government should consider taxfor shale gas development. Shale gas is a new type reduction or exempt. Third, direct fiscal subsidies areof minerals acknowledged by the State Council. The expected and they can fluctuate with market conditionsgovernment should set up shale gas resource management Fourth, the government should encourage the use of shaleinstitutions which is suitable for its development as soon gas, especially local utilization at going prices. All shaleas possible. Supporting management rules should be set up gas producers should have equal and open rights to useto meet the demand of market economy system reform and natural gas pipeline networksshale gas development and utilization. The governmentshould focus on shale gas mining rights rules and draw up Development shale gas industry practically andrules on shale gas exploration rights bidding management, scientificallyreserve management and geological data managementShale gas is a kind of unconventional resourceRelevant regulations should be issued to define the range, and we should explore, produce and utilize it in arcontent and ways of regulation. Supporting management unconventional way with creative institutions and systemsrules can not only provide institutional assurance forto realize fast development in a relatively short time. Butqualified and competent enterprises entering the shale gas as a kind of subsurface mineral resources, the explorationdevelopment market, but also set up regulation rules forand development of shale gas must obey basic laws ofall companies engaged in shale gas development to ensure mineral resource development and market economy. Wescientific, in order, effective and environment-friendlynd developmcan speed up the development but we cannot go beyondprocedures or being"too hot". Government agenciesEnhance r&d to solve key technical problems and companies cannot pay attention to shale gas only byrelevant to shale gas developmentAlthough Chinese oil companies have acquired someexploration and development of shale gas. Only by doingso, can we prevent a"too cold"situation after sufferingunconventional resource development technologies,tfrom setbacks in shale gas development. It is not good foris far from the need of shale gas massive production. the development of shale gas by being "too hot"or"tooIt is urgent to enhance R&D to solve the key problemscold". In other words, we cannot rush into the industryrelated to shale gas development. First, we should with all resources with blind mind or stop and do nothingimprove shale gas geological assessment methods andwhen we encbetter the assessment methods and parameter selection for中国煤化工re. On theadvance shalecontinental and transitional facies shale gas in particularcontrary,CNMHGgas explorationa iung time to realizeSecond, we should develop measuring technology andous developmentequipment on analyzing gas content of shale. Third, we序数辉202