Shale Gas in Asia: Significant Reserves, Substantial Challenges
By Jennifer Tomsen and Marc Davies
Jennifer Tomsen is a shareholder in Greenberg Traurig’s Houston office. She has a doctorate in Environmental Policy and a J.D., magna cum laude, from Duke University School of Law. Marc Davies is a shareholder in Greenberg Traurig’s Philadelphia office. He received his J.D., cum laude, from Temple University James E. Beasley School of Law. For more information, visit http://www.gtlaw.com.
The opinions in this article do not represent the views of Bloomberg BNA, which welcomes other points of view.
The race to develop shale gas in Asia, which some have likened to a gold rush, has begun to feel more like a marathon than a sprint. China’s Shale Gas Development Plan for 2011-2015, released in March 2012, set a production goal of 6.5 billion cubic meters of shale gas by 2015, amounting to roughly 6 percent of China’s total natural gas output. But the region’s biggest shale player recently scaled back these projections, as China has run into more obstacles than expected in developing its abundant reserves.
India and Indonesia are likely to emerge just behind China as major shale gas players in the coming decades, but both face similar or greater obstacles to reach that point.
China: Difficulty Moving to Production
Reserve estimates indicate that China contains the largest shale gas reserves in the world, nearly twice the size of U.S. reserves. A June 2013 report from the U.S. Energy Information Administration puts China’s technically recoverable shale gas reserves at 1,337 trillion cubic feet (tcf).1 These reserves account for almost 20 percent of the global total and approximately 92 percent of the reserves in Asia.2 China contains approximately 13 times more shale gas reserves than its remaining recoverable conventional gas resources.3Despite concerted efforts over the past several years to move toward large-scale production, China is still very much in the exploration and assessment phase of shale gas development. Acknowledging a lack of comprehensive data, its March 2012 plan reflected the government’s intent to complete a nationwide survey and appraisal of shale gas resources.4
The Chinese government is committed to rapid development of its shale gas resources. For at least the past five years, China has been determinedly working to develop the means to efficiently and profitably extract its shale gas. The government hopes to follow the successful trajectory of shale gas development in the U.S., which has developed infrastructure and extracted increasing quantities of unconventional gas on a growing scale for decades. Despite the significant efforts of a bureaucracy unaccustomed to defeat, China has so far been unable to bring its ambitious shale gas plans to fruition.
Technologically Savvy Partners Hard to Find
China’s biggest challenge is technological: It lacks the necessary personnel and equipment to exploit its shale gas reserves on a large scale. Extracting shale gas is more expensive and more difficult than obtaining conventional oil and gas resources because shale gas is trapped in rocks deep underground. A technique called hydraulic fracturing, or “fracking,” is used to extract gas from shale. Fracking uses large amounts of pressurized water to fracture the rock pores, freeing the gas trapped within. Chemicals in the water prop the pores open and allow the gas to flow, where it can be forced to the surface and extracted.
The use of horizontal drilling, which involves burrowing underground at an angle to better reach shallow but wide shale layers, made fracking possible on a large scale. First employed widely in the 1980s in western states such as Texas and North Dakota, the use of horizontal drilling and hydraulic fracturing to access shale gas has rapidly expanded to other regions in the United States and elsewhere, including Mexico, Canada and Europe.
China, seeking to gain a stronger technological foothold in the shale gas field, entered into a 2009 Memorandum of Understanding (MOU) with the U.S. to foster the sharing of shale gas knowledge and technology. Despite this MOU, few if any energy companies in China currently have the knowledge, tools and infrastructure to develop shale gas efficiently and cost-effectively. Large state-run companies PetroChina and Sinopec are likely the only companies in China with sufficient pipeline capacity and significant experience in extracting and developing natural gas to be viable leaders in shale gas. However, they are relatively inexperienced when it comes to developing unconventional natural gas plays when compared to companies in the United States.
Some energy companies such as Royal Dutch Shell have signed on as partners for a stake in the Chinese shale plays. Chinese representatives from both government and the private sector have expended considerable effort courting international companies as partners in the anticipated shale gas boom. However, government ownership of mineral resources and its tight control over markets have curbed the enthusiasm of many major international energy players to join in Chinese shale gas efforts. Intellectual property concerns remain; much fracking-related software and technology is patented or is regarded as a trade secret. For example, in the U.S., companies have historically guarded the precise chemical composition of the fracking fluid they use as a trade secret. Federal laws also limit sharing of intellectual property with China. While nascent disclosure obligations will open up some of this information within the U.S., including through chemical disclosure registry FracFocus.org, major fracking players likely remain concerned that their role in a Chinese partnership could be limited to sharing technical know-how and to early-stage rather than long-term joint development.
For their part, the Chinese consider much basic geologic and well data that is publicly available in many other countries to be state secrets, hampering exploration and evaluation.5 Such limitations further contribute to the reluctance of international energy companies to make big investments in China’s shale gas.
PetroChina and Sinopec hold the rights to most prospective shale gas acreage in China and have drilled most of the 130 shale gas wells to date, only a handful of which are producing gas at the break-even point to cover costs.6Reaching China’s 2015 output target would require 1,800 wells at a cost of 126 billion yuan ($20 billion).7Neither state-run company plans to drill even close to that number of wells.8 The companies appear to be finding it more profitable to develop other unconventional gas resources such as coalbed methane or to continue development of conventional sources.
The first Chinese auction of blocks for shale gas exploration was held in 2011, with participation limited to six state-run entities. In late 2012, in an effort to speed the pace of development, China opened its second shale gas auction to a broader range of Chinese companies. More than 80 companies submitted 152 bids, not only the national oil companies but also electricity, coal, machinery and equipment manufacturing, investment and real estate companies.9 More than half the auction winners were coal and electricity businesses, and half were affiliated with local governments; the large national oil companies were not among the winners.10 Of the 16 companies that won exploration rights, none had ever drilled a gas well.11 A third auction is expected this year.
China also lacks sufficient pipeline capacity and infrastructure to transport gas to the main population centers, sometimes thousands of miles from the source.12 Major gas transmission lines are owned by the state and currently committed to conventional gas.13 Although China is working to expand its pipeline networks, if production activity increases, it may be held up by an inability to move the gas from the production fields.
As a result, China’s efforts to exploit its considerable shale gas riches require it to grapple with developing both the technology for shale gas extraction and the distribution infrastructure at the same time.
Geology, Demography, Environment Pose Hurdles
Other challenges also face the Chinese and those who hope to share in China’s shale gas future. Geologic, demographic and environmental factors are providing some unforeseen and significant hurdles.
Some analysts believe China’s shale gas reserves are typically deeper underground than reserves in many other countries, including the U.S., making extraction more expensive and technologically challenging. China will need to drill more wells with a longer reach to achieve an output similar to that in the U.S.14 Its mountainous terrain and other geologic features further complicate extraction efforts.
The U.S. Energy Information Administration reports that the complex geologic structure of Chinese shale, including faulting and high tectonic stress, poses challenges.15 The report notes that PetroChina’s first horizontal shale well in the Sichuan Basin required 11 months to drill, versus the usual two to three weeks in North America.16
Chinese shales also differ materially in composition from those in the U.S. Shales in most Chinese basins are rich in clay, making them more difficult to fracture and lowering productivity.17 More complex technology may be necessary to fully exploit these resources.
The geologic composition of shale gas regions within China also generates concerns related to potential seismic activity triggered by the injection of fracking wastewater into underground wells. Comprehensive study of the potential connection between wastewater injection and seismic events is just beginning. The 2008 earthquake in Sichuan province that killed nearly 70,000 people can only heighten local sensitivity around this issue. Whether or not a connection is ultimately proven between wastewater injection and seismic events, in the interim, fears about the practice could present obstacles, particularly at local levels.
In comparison to the U.S., China is much more densely populated in areas where shale gas is found. China’s density of 144 people per square kilometer versus 34 people per square kilometer in the U.S. may require greater spacing between wells, and therefore lower productivity.18 The potential hazards to human health and safety may also be greater, as well as the general resistance from local communities. In this regard, the structure of Chinese society creates one problem for shale gas development not seen in the U.S. In China, the government owns the mineral estate and sponsors the projects. Individual landowners are less likely to benefit from drilling and related activities, robbing shale gas exploration in China of the very class of landowning proponents that have been important to shale gas development in the U.S.19
Another key concern in China is the water-intensive nature of fracking. Each fracking well uses 2 million to 4 million gallons of water to drill and fracture. Water consumption is a concern almost everywhere fracking takes place around the world, but the concern is particularly acute in China. China faces significant water shortages in the coming decades, especially in the north and west. A 2009 study projected that by 2030, China’s water demand will significantly outstrip its supply and that eight out of 10 river basins will experience shortages.20Some of the most desirable shale plays are in river basins already experiencing acute water scarcity. China is investigating solutions to this problem, including desalinizing and transferring seawater, and transferring water from areas where it is relatively plentiful in the south to areas of scarcity in the north.21
Lack of Regulatory Structure Poses Problems
Focusing on technological feasibility and cost efficiency, China has devoted comparatively little effort to developing a national regulatory regime to govern shale gas extraction. However, China is devoting some time and study to regulatory issues. For example, the Chinese are currently participating in training workshops funded by the U.S. Trade and Development Agency to introduce Chinese energy sector officials and project sponsors to U.S. shale gas best practices, policies and technologies. The second of four workshops, the Environment, Health and Safety Workshop held in Beijing in July 2013, addressed issues of waste management, air quality, greenhouse gas emissions, truck traffic, induced seismicity and surface disturbance.
In March 2013, China announced it would soon be releasing new policies supporting the development of shale gas. These policies, which have not been seen as of October 2013, are expected to present guidelines regulating the award of mineral rights and acreage bids as well as technology, research and infrastructure.22
The current lack of a comprehensive regulatory framework in China means drilling companies may face fewer obstacles related to environmental and health hazards. On the other hand, fragmentation and overlapping responsibilities among local regulators create concerns about inconsistent enforcement and lack of coordination. These concerns are contributing to further hesitancy on the part of international energy companies to partner with the Chinese on shale gas.
India: The Same Challenges, Even More So
India lags behind China by a substantial margin in promoting shale gas development. The country faces many of the same challenges as China in developing its shale gas resources. Like China, India lacks the software and technology necessary for shale gas extraction as well as the infrastructure for distributing the gas once extracted. The country is even more densely populated than China, and as in China, subsurface rights are owned by the government. India is also facing widespread severe water shortages in the near future. Most of the currently known shale gas reserves are located inland in areas already facing critical water shortages.23
India will also likely face similar challenges in recruiting international energy partners, for many of the same reasons and because of the probable smaller size of its shale gas reserves, though the scope of those reserves remains uncertain. A 2012 estimate by the U.S. Geological Survey put India’s reserves at only 6.1 tcf, while the U.S. Energy Information Administration estimated those same reserves at 96 tcf in 2013.24 The larger estimate of reserves still makes India’s shale gas resource a fraction of the size of China’s. However, other analysts have estimated the size of India’s reserves as considerably larger, noting that the vast majority of potential gas-yielding regions remain unexplored.25 India’s shale basins are geologically complex, and India lacks public data on the geologic setting and reservoir properties of its shale formations.26
Assuming a reasonably sizable reserve, India’s shale gas offers hope for a country much in need of additional energy sources. A policy paper by the Indian Council for Research on International Economic Relations began:
The twin power blackouts of late July 2012 that plunged the better part of a billion people into darkness were a grim reminder that India is approaching the precipice of a severe energy crisis. … Today, the country’s peak power shortage already stands at approximately 12%. … The gravity of the situation becomes more pronounced when one considers that over 300 million of the country’s population are yet to receive their first electricity connection. With demand expected to rise by 7-8% annually in the coming decade, the situation is certainly trending towards critical.27
India’s shale gas industry is still at the early exploratory stages. But there is growing interest in India in fostering rapid development of this resource, particularly because the inland location of much of the shale gas could provide significant resources to an energy-starved region of the country. In 2010, India entered into a Memorandum of Understanding with the U.S. to foster the sharing of shale gas knowledge and technology. In an aggressive move to spur shale gas development, the government decided to double natural gas prices from April 2014.28 With the approval in September 2013 of an exploration program, an auction for shale gas blocks is expected to take place soon, opening shale gas exploration and production to private companies in addition to state-owned entities.29
The world’s fourth most populous country, Indonesia has technically recoverable shale gas reserves estimated at 46 tcf.33 Its reserves are deeper than those in the U.S., however, making the cost of drilling per well considerably more expensive. Indonesia also faces the same challenges from a lack of physical and regulatory infrastructure as do China and India. As an archipelago, Indonesia presents unique obstacles to developing the distribution networks necessary for large-scale shale gas production.
1 “Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States,” U.S. Energy Information Administration report, June 13, 2013, p. XX-2.
2 “Shale gas: Key considerations for India,” Ernst & Young report, Oct. 14, 2012, p. 5.
3 “Golden Rules for a Golden Age of Gas,” International Energy Agency Special Report on Unconventional Gas, May 29, 2012, p. 115.
4 Jane Nakano, David Pumphrey, Robert Price Jr., Molly A. Walton, “Prospects for Shale Gas Development in Asia,” Center for Strategic and International Studies, August 2012, p. 5.
5 “Technically Recoverable Shale Oil and Shale Gas Resources,” supra n.1, p. XX-9.
6 Chen Aizhu, “China’s fading shale gas push,” Sept. 9, 2013,http://www.businessspectator.com.au/article/2013/9/9/energy-markets/chinas-fading-shale-gas-push.
9 Jane Nakano, Ksenia Kushkina, “China Awards More Shale Gas Blocks Although Much Remains to be Seen,” Center for Strategic & International Studies, Jan. 29, 2013.
11 Aizhu, supra n.6.
12 “Shale Development: Global Update,” KPMG Global Energy Institute, 2013, p. 12.
13 Nakano et al., supra n.4, p. 19.
14 “Golden Rules for a Golden Age of Gas,” supra n.3, p. 116.
15 “Technically Recoverable Shale Oil and Shale Gas Resources,” supra n.1, p. XX-6.
17 Nakano and Kushkina, supra n.9.
19 Some companies have compensated local residents for the use of their land and roads. Brian Spegele and Justin Scheck, “Energy-Hungry China Struggles to Join Shale-Gas Revolution,” Sept. 5, 2013,
20 Nakano et al., supra n.4, p. 21.
22 Song Yen Ling, “China to release new policies to support shale gas development: report,” March 19, 2013,http://www.platts.com/latest-news/natural-gas/Singapore/China-to-release-new-policies-to-support-shale-7640216.
23 Hermant K. Singh, Aman R. Khanna, “India’s Energy Options: the Road Ahead,” Indian Council for Research on International Economic Relations, October 2012, p. 21.
24 “Technically Recoverable Shale Oil and Shale Gas Resources,” supra n.1, p. XXIV-2.
25 Singh and Khanna, supra n.23, p. 10.
26 “Technically Recoverable Shale Oil and Shale Gas Resources,” supra n.1, p. XXIV-4.
27 Singh and Khanna, supra n.23, p. 1.
28 “Produce or perish: Moily tells industry,” Mumbai Business Standard, July 27, 2013, http://www.business-standard.com/article/economy-policy/produce-or-perish-moily-tells-industry-113072600837_1.html.
29 Andhra Pradesh, “Private companies will get to explore shale in existing blocks,” The Economic Times, Sept. 27, 2013.
30 Tito Summa Siahaan, “Shale Gas Still a Distant Ambition for Indonesia,” Jakarta Globe, June 20, 2013,http://www.thejakartaglobe.com/business/shale-gas-still-a-distant-ambition-for-indonesia-2/.
31 Tim Daiss, “Indonesia Tries to Jump-Start Its Own Shale Revolution,” Energy Tribune, June 26, 2013,http://www.energytribune.com/77912/indonesia-tries-to-jump-start-its-own-shale-revolution#sthash.gaBTxXpw.dpbs.
32 “Indonesia ripe for U.S. investment in shale gas?” United Press International, Sept. 30, 2013,http://www.upi.com/Business_News/Energy-Resources/2013/09/30/Indonesia-ripe-for-US-investment-in-shale-gas/UPI-84351380564855/.
33 “Technically Recoverable Shale Oil and Shale Gas Resources,” supra n.1, p. XXIII-2.