India and China Will Soon Produce Natural Gas From Shale

by: Vinod Dar

India and China have been contemplating the development of domestic shale resources for some years now. The successes of US and Canadian oil and gas E&P companies in producing natural gas from shale, the rapid increase in North American natural gas reserves, driven largely by shale, the continued expansion in commercially productive shale basins in North America and the impressive advances in the family of technologies needed to profitably produce natural gas (and now gas liquids and oil in the Eagle Ford, Barnett and Bakken basins, for example) from shale basins has impressed both the governments and the domestic oil and gas companies of India and China.

Both countries suspect that their own shale resources are considerable and that natural gas from shale can, in a decade, materially limit the present rapid growth in imported natural gas via international pipelines and LNG. The national security and domestic income and jobs implications are also obvious to these two nations. In both these Asian countries the transition from studying to active, sustained and substantial investment is very near.

China is perhaps three to five years ahead of India in the shale development trajectory, as it is in developing coal bed methane and tight sands resources. China has also been far more welcoming of foreign companies, both majors and very large independents, in the "unconventional" natural gas E&P (including Royal Dutch Shell (NYSE:RDS.A), Total (NYSE:TOT), Conoco-Phillips (NYSE:COP)) business than India but the attitude of the latter is changing, in frank imitation of the former. Both countries have a strong interest in securing US technological and operating skills in developing shale assets. The Sino-US Shale Gas Resources Cooperation Initiative was signed in 2009. In November 2009, China National Petroleum Corp (CNPC) via its publicly traded entity PetroChina Co. entered into an agreement with Shell to evaluate shale gas resources in Sichuan province (southwestern China). A similar Indo-US agreement on shale gas is likely to be executed within several months.

Both Indian and Chinese companies are planning multi-billion dollar investments in the North American shale industry via joint ventures to gain operating knowledge, insight into cost structures, experience with cash flow profiles and preferential access to technology and business processes, while earning an attractive return on capital. In June 2010, Reliance Industries Ltd of India made its second large investment in North American shale (buying into Pioneer Natural Resources' Eagle Ford position, following a joint venture with Atlas Energy in the Marcellus basin). Also in June 2010, CNPC signed an initial agreement with EnCana Corp (NYSE:ECA) to jointly invest in shale development in British Columbia.

In 2012 , India plans to offer shale gas areas for exploration. Several basins have shale resources but delineation of these is rudimentary: perhaps where the US was 25 to 30 years ago. The primary focus will be on three basins. These are the Cambay in Gujarat, the Assam-Arakan in the Northeast and the Gondwana in central India. In April 2010, the Oil and Natural Gas Corp (ONGC) awarded a small contract to Schlumbeger Ltd to drill delineation and exploration wells in the Assam-Arakan basin. The results are expected to be made public by year end 2010. ONGC expects to start a pilot project to produce shale gas in 2011, assuming the results from the exploratory well are encouraging. India's demand for natural gas is so large and its proven and probable gas reserves so meager that if shale gas is discovered in commercially attractive quantities, Indian public policy properly aligns risk and rewards and field infrastructure to process and take away gas can be built swiftly, both domestic and foreign companies are likely to commit major resources to producing shale gas in notable amounts within six to seven years.

China's most promising shale gas basins are in Sichuan, North China's Inner Mongolia Autonomous Region and Northwest China's Xinjiang Uyghur Autonomous Region, although as in North America and India multiple shale gas basins have been identified. American geologists who have been studying Chinese shale basins agree with Chinese geologists that China's shale resource base may rival that of the US. Of course, it will be at least a decade before this resource base can be transformed into sizeable reserves. The Chinese government claims that its shale resource base exceeds 900 trillion cubic feet (Tcf). If even a third can be eventually converted into reserves, over the course of a generation, the reserve base would be still be very impressive and turn China into one of the world's leading natural gas producers.

The Chinese government asserts that initial commercial shale gas production could start in early 2011 in Chongqing in Southwest China with the aim of reaching 500 million cubic feet per day (mmcfd) in national production in 2015. In comparison, US shale gas production is expected to average 7,500 mmcfd in 2010 and reach 10,500 mmcfd in 2015. It was 3,200 mmcfd in 2007, which indicates how rapid the growth trajectory can be once a critical mass is attained. It is this kind of growth that China aspires to and with a lag, so does India.

In China the Ministry of Land and Resources, CNPC and Sinopec (NYSE:SHI) are undertaking several well-followed shale surveying and exploration projects, both independently and in collaboration with foreign companies that include Conoco-Phillips (COP), BP (NYSE:BP) and Shell. Sinopec hopes to produce 240 mmcfd from shale gas in 2015 with a long term goal of producing almost 3,000 mmcfd from shale. CNPC has more modest near-term goals and expects to produce only about 50 mmcfd from shale gas in 2015.

India, China, Poland, Hungary, Estonia , Australia are just some of the emerging shale natural gas plays internationally. There are many shale gas basins all over the world. The shale industry that emerged in the late 1990s in the US, because of the ingenuity and determination of American independent E&P companies based in Texas and Oklahoma, is already a significant source of jobs, income and LNG displacement in North America. In the next 10 years, this industry will become multinational and maybe within 20 years it will be a global business with commercial production in 20 to 30 countries and dozens of basins, worldwide.

Disclosure: The author owns stock in Conoco-Phillips.

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