China Faces Choices on Shale Gas Goals

As China struggles to meet its goals for shale gas development, there are signs that the government will face pressure to subsidize the costs, perhaps for years.

The industry came close to meeting the government's target for extracting natural gas from shale rock formations last year, producing 1.3 billion cubic meters (bcm) of the new fuel compared with a goal of 1.5 bcm (52.9 billion cubic feet).

But 1.14 bcm, or nearly 90 percent of the gas, came from a single field, the Fuling block in southwestern Chongqing municipality, under development by state-owned China Petroleum & Chemical Corp. (Sinopec).

In August, the National Energy Administration (NEA) sharply scaled back its 2020 target for shale production from 60-100 bcm to 30 bcm, while leaving its 2015 goal of 6.5 bcm intact.

Producers may have a good chance of coming close to the 2015 target, since Sinopec expects to raise output capacity to 5 bcm this year and 10 bcm in 2017, according to Reuters.

CNPC PetroChina has voiced confidence that it will fulfill plans to produce 2.6 bcm this year at fields in southern Sichuan province, Bloomberg News reported in October.

In December, CNPC and Sinochem Group also announced plans to invest U.S. $4 billion (25 billion yuan) with local state- owned enterprises in Chongqing shale production by 2017.

If it does, the government could create a "single buyer" to absorb the losses, which would then be covered, or it could pressure the state oil companies to keep exploring despite lower prices and higher losses, said Andrews-Speed.

The government would then have to decide whether to pay annual subsidies or increased payments for shale and CBM production, he said.

( Edited by Topco)