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ECONOMIC DECISION-MAKING AND RISK MANAGEMENT FOR CHINA’S SHALE PLAYS 中国页岩气开发中的经济决策与风险管理 SHALE TECH CHINA BEIJING MARCH 28, 2013. Mark Cronshaw, Gustavson Associates. Shale Gas Success in the U.S. 美国页岩气的成功.

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ECONOMIC DECISION-MAKING AND RISK MANAGEMENT FOR CHINA’S SHALE PLAYS中国页岩气开发中的经济决策与风险管理SHALE TECH CHINABEIJING MARCH 28, 2013

Mark Cronshaw, Gustavson Associates

shale gas success in the u s
Shale Gas Success in the U.S.美国页岩气的成功

http://www.bondvigilantes.com/blog/2013/02/20/europe-china-and-shale-gas-euphoria-or-rejection/

large u s supply yields low u s price
Large U.S. Supply Yields Low U.S. Price美国大量页岩气供给与低廉价格

http://www.bondvigilantes.com/blog/2013/02/20/europe-china-and-shale-gas-euphoria-or-rejection/

can china copy or better the u s
Can China copy (or better) the U.S.?中国是否能效仿(超越)美国?
  • Demand
    • What is demand for gas?
  • Supply
    • Resource?
    • Technology
    • Water availability
  • Infrastructure
    • Transmission
    • Distribution
  • Economics
    • Production decline
    • Costs – capital and operating
    • Wellhead price
    • Fiscal terms
brief history of shale gas in china
Brief History of Shale Gas in China中国页岩气开发历史
  • April 2010 PetroChina drills first (vertical) shale gas well (Wei-201)
  • March 2011 Petrochina completes first horizontal well
    • TD 2800m
    • Horizontal section > 1000m
    • 11 frac stages
  • 2011 PetroChina drills 7 additional shale gas wells
    • Yang-201 flowed up to 430,000 CM/d

http://business.financialpost.com/2013/01/17/china-offers-greatest-prize-of-all-for-shale-gas/?__lsa=e123-d999

primary energy consumption in china
Primary Energy Consumption in China中国一次能源消耗量

Source: BP Statistical Review of World Energy 2012

motivations for shale gas in china
Motivations for Shale Gas in China为什么中国要开发页岩气?
  • Demand for energy is increasing rapidly
  • Natural gas generates electricity with half the carbon dioxide emissions of coalhttp://news.nationalgeographic.com/news/energy/2012/08/120808-china-shale-gas/
  • China has huge shale gas resources
china gas production and consumption
China Gas Production and Consumption中国页岩气的生产与消耗

Sources: BP Statistical Review of World Energy 2012 & Platts

  • 2015 planned shale gas production in China: 6.5 billion CM
  • June 2012 Sinopec started drilling 9 shale gas wells in Chongqing
  • Sinopec plans 300 to 400 million CM shale gas production in 2014
  • PetroChina targets 1 billion CM shale gas production in 2015

http://news.nationalgeographic.com/news/energy/2012/08/120808-china-shale-gas/

http://www.cuog.cn/en/news/201301298153.html

http://www.cuog.cn/en/research/201206017555.html

other natural gas sources
Other Natural Gas Sources其他天然气资源
  • Pipeline imports and LNG ($13-17/MCF)
  • Syngas, from coal ($7-8/MCF)
    • 2015 forecast 16 BCM/yr
    • 2020 forecast 55 to 130 BCM/yr
    • Sinopec plans two syngas pipelines (30 BCM/yr each)
  • Coal bed methane (forecast 20 BCM/yr by 2020)
  • China spent $17 billion on gas imports in 2012

http://blogs.platts.com/2013/01/03/china_2013/

www.bloomberg.com/news/print/2013-02-19/china-s-shale-gas-no-revolution-as-price-imperils-output-energy.html

unconventional gas basins in china
Unconventional Gas Basins in China中国非常规气盆地
  • Tarim basin is very dry – limited water

Marine deposits

Source: Gas Pricing and Regulation, IEA, 2012

shale gas resources in china
Shale Gas Resources in China中国页岩气资源
  • Technically recoverable shale gas 36 trillion m3 (EIA)> 200 year supply at current consumption

http://www.cges.co.uk/resources/articles/2012/02/07/shale-gas-discovery-in-china

property rights
Property Rights 矿权
  • Sichuan basin
    • PetroChina/Shell
    • Sinopec/Conoco/Chevron
  • First auction June 2011
    • 6 bidders for 4 blocks
    • 2 blocks awarded
  • Second auction Oct. 2012
    • 20 gas reserve blocks in eight provincial regions
    • 20,002 square kilometers
    • 83 bidders

http://energyinasiablog.com/

http://www.chinadaily.com.cn/business/2012-11/15/content_15933183.htm

natural gas infrastructure
Natural Gas Infrastructure 天然气基础设施

Expected new construction by 2015

  • Over 40,000 km of gas pipelines
  • 50 billion CM/year capacity
  • 20 billion CM/year of gas storage capacity
  • Link producing regions (western and central China) to population centers (coastal/eastern regions)

Gas Pricing and Regulation, IEA, 2012

http://www.platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/7305076

technological uncertainties
Technological Uncertainties技术不确定因素
  • Conventional gas –
    • Will you find hydrocarbons?
  • Shale gas
    • What is the best completion technology
    • How will production rate decline over time?
    • Environmental impact

http://www.online-advice-service.com/environment/archives/479

shale gas challenges
Shale Gas Challenges 页岩气挑战
  • Large water needs
  • Water contamination risks
    • Surface spills
    • Fracking contamination
  • Rugged surface terrain
  • Frack design
  • Economics
  • Lack of gas pipelines
fracking
Fracking 压裂
  • Fracking: about 20 million liters of water per well
  • Concerns about water disposal
  • Poor well cement jobs can cause problems
  • Shales in China tend to have more clay than in U.S.
  • Possible future fracking technologies
    • More recycled water, new water treatment methods
    • Replace most water with fine flowing particles
    • Fracking computer simulations

http://www.technologyreview.com/news/508146/china-has-plenty-of-shale-gas-but-it-will-be-hard-to-mine/

http://www.technologyreview.com/news/428076/can-fracking-be-cleaned-up/

us production experience
US Production Experience 美国开发经验
  • Wide range of production rates
  • Rapid production rate declines in all cases

SPE 135555 “Shale Gas Production Decline …”, Baihly et al, Schlumberger

technology partnerships
Technology Partnerships 技术合作
  • Feb. 2013 CNOOC acquires Nexen ($15.1B)http://www.foxbusiness.com/news/2013/02/26/cnooc-completes-nexen-buy-news-follows-sinopec-chesapeake-deal/
    • Shale gas reserves in British Columbia
  • Feb. 2013 China Petrochemical Corp (Sinopec) agrees to buy 50% stake in Chesapeake’s Mississippi Lime venture ($1B)http://www.foxbusiness.com/news/2013/02/26/cnooc-completes-nexen-buy-news-follows-sinopec-chesapeake-deal/
  • Feb. 2012 PetroChina invests in Shell’s Groundbirch shale gas project (Canada)
  • Jan. 2012 Sinopec JV with Devon Energy ($2.5B)http://news.nationalgeographic.com/news/energy/2012/08/120808-china-shale-gas/
  • 2010 & 2011 CNOOC invests in Chesapeake shale oil ($3B)
  • Shell/CNOOC joint venture
  • BP/Sinopec, Total/CNPC, and Shell/PetroChina drilled in Sichuan province

http://energyinasiablog.com/2012/05/11/3-reasons-why-shale-gas-is-a-pipe-dream-in-china-part1/

natural gas pricing 1 1
Natural Gas Pricing – 1天然气定价-1
  • Ex-plant gas prices and pipeline transmission fee set by National Development and Reform Commission (NDRC)
  • City gas distribution fee set by local governments
  • Dec. 2011 - NDRC announced natural gas price reform pilot scheme in S. Guangdong & Guanxi provinces
    • City gate gas price linked to import prices of fuel oil and LPG
    • Market price allowed for unconventional gas (including shale gas)
  • VAT rebates granted for LNG imports from 2011 to 2020
  • Shale gas price subsidy:
    • 0.4 yuan per cubic meter from 2012 to 2015

http://www.nortonrose.com/knowledge/publications/66881/the-natural-gas-pricing-system-in-china http://www.nortonrose.com/knowledge/publications/63293/has-china-finally-picked-up-the-pace-on-its-natural-gas-reform

http://www.mondaq.com/unitedstates/x/217828/Oil+Gas+Electricity/China+Issues+New+Natural+Gas+Utilization+Policy

natural gas pricing 2 2
Natural Gas Pricing – 2天然气定价-2
  • Dec. 2012 – New Natural Gas Utilization Policy in effect
    • Netback pricing
    • Seasonal and interruptible prices encouraged
    • Customer categories: preferred, permitted, restricted, prohibited
    • Gas-fired power projects now permitted anywhere in China (except base load gas-fired power projects prohibited in thirteen large coal-producing areas, e.g. Shaanxi, Mongolia, Jiangxi, and Anhui provinces)
    • City gate prices (RMB/CM)
      • Guangxi 2.57
      • Guangdong 2.74
      • Other 1.8 to 2.3

http://www.nortonrose.com/knowledge/publications/66881/the-natural-gas-pricing-system-in-china http://www.nortonrose.com/knowledge/publications/63293/has-china-finally-picked-up-the-pace-on-its-natural-gas-reform

http://www.mondaq.com/unitedstates/x/217828/Oil+Gas+Electricity/China+Issues+New+Natural+Gas+Utilization+Policy

http://www.chinadaily.com.cn/business/2012-11/15/content_15933183.htm

typical chinese psc terms psc
Typical Chinese PSC terms中国典型的PSC条款

May not apply to shale gas

  • Value Added Tax (VAT) rate of 5% of Gross Revenue
  • Royalty rate of between 0% to 3% for gas production
  • Cost Recovery Ceiling of 60% of Gross Revenue for onshore discoveries
  • Contractors’ share of Profit Petroleum varying from 98% to 40% depending on the level of production
  • State Participation is typically 51% on a carried basis
  • Signature Bonus of US$1 million
  • Income Tax rate of 25% of taxable income

The Economics of Petroleum Exploration and Development in China, Master’s Thesis, Wanwan Hou, Jan. 2009

decision making and risks
Decision-Making and Risks决策与风险
  • Key decision – Explore and develop shale gas in China?
  • Risks
    • Uncertain production rates: initial and decline
    • Fracking
      • Frac design
      • Water availability
    • Costs: capital and operating
    • Pipeline capacity
    • Pricing
    • Economics