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China's Energy Treasure Trove May Just Be Fool's Gold After All
fool ^ | May 25, 2014 | Tyler Crowe

Posted on 05/25/2014 6:37:17 PM PDT by ckilmer

China's Energy Treasure Trove May Just Be Fool's Gold After All

By Tyler Crowe | More Articles | Save For Later
May 25, 2014 | Comments (0)

What is more disappointing? Finding out that you missed out on something from the get go, or getting good news and only later finding out that it wasn't what you expected? Personally, I think the latter is harder to stomach, and that is why PetroChina (NYSE: PTR  ) and Sinopec (NYSE: SNP  ) probably aren't taking the recent news about China's shale gas reserves too well. Let's take a look at how what were once considered the largest shale gas resources on the planet may end up being a red herring after all and why this could benefit large international gas players like ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) .

From hysteria to humility
Last year, the United States Energy Information Administration published its most recent assessment of shale resources around the world. In that report, it was estimated that China's technically recoverable shale gas resources were a whopping 1.1 quadrillion cubic feet. That's almost double the United States' estimated resources and enough to meet China's current demand for gas for over 200 years. Gas resources that size are enough to completely change the dynamic of a country, even one as large as China. 

However, what we are starting to discover is that technically recoverable resources don't necessarily translate to economically recoverable reserves. According to data collected by Petrochina, a more realistic amount of natural gas that can be extracted from China's shale resources is less than one-third of the EIA's original estimate, and the gas that is in place is considerably more difficult to access than the deposits found in the U.S. On average, production from wells drilled in the Sichuan Province, China's most lucrative shale formation, are about 2.5 times that of a well found in America's best shale gas play, the Marcellus. The problem is, though, that the cost for a well there is four times that of a Marcellus well.

To add insult to injury, many of the other regions where shale gas is found simply don't have the infrastructure in place to make them feasible -- be it remote locations in the Western deserts where water is extremely scarce, or in bustling urban areas that make drilling locations prohibitive.

Source: Bloomberg Industries

Ultimately, this will probably mean two things. In the short term China will fail to meet its shale gas production targets. The country is currently on track to produce about 63 billion cubic feet of shale gas this year, but to keep pace with government-projected targets it would need to quadruple today's production, which will be extremely challenging. Longer term, though, several of these shale resources may be left in the ground. With China driving a hard bargain on its Russian gas supply megadeal and a dearth of LNG coming online in the next couple of years, its natural gas resources may not be tapped for several years down the road.

Making lemonade out of the sour situation
What this basically boils down to is that China will likely be increasingly reliant on natural gas imports. The country is looking to move away from coal -- or at the least less pollution-intensive coals -- and natural gas will likely need to be the fuel to replace it for the foreseeable future. China is currently in the process of building over 42 million tons per year of LNG regasification terminal capacity. 

Chevon, Royal Dutch Shell, and others are working with Sinopec and Petrochina on many of their shale gas projects, but probably if they had their choice they would rather serve Chinese gas demand through LNG shipments. One of the reasons is that much of the work in China is through production sharing, but the more important reason is that the margins for LNG are much better. According to ConocoPhillips, its LNG investments -- which will likely serve the Asia-Pacific market because of location -- will average a per barrel oil equivalent margin greater than $40.

Source: ConocoPhillips Investor Presentation

Based on the projects that are slated to come online from these players, both Chevron and ExxonMobil would be likely to benefit the most. Chevron's Gorgon, Wheatstone, and Kitimat LNG facilities would add about 19.2 million tons per year of LNG export capacity almost exclusively geared to serve the Asia Pacific market. ExxonMobil, with its Papua New Guinea LNG facility slated to start up in the next couple months, its own equity investment in Gorgon, and its potential 30 million tons per year facility in Canada, would make Exxon one of the largest LNG suppliers in the region. Also, an added benefit for Exxon is that it doesn't have any significant shale deals in place in China.

What a Fool believes
Without abundant shale gas resources, China will be more reliant on imports. The recent deal between Russia and China will help cover a large part of it, but it will still need vast quantities of LNG down the road. This should bode well for big oil and their LNG plans, provided of course that these projects can actually be built on time and reasonably on budget.


TOPICS: Business/Economy
KEYWORDS: china; fracking; oil; shaleoil

1 posted on 05/25/2014 6:37:17 PM PDT by ckilmer
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To: thackney; SunkenCiv

fyi


2 posted on 05/25/2014 6:37:59 PM PDT by ckilmer
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To: ckilmer

When is China going to put out their coal seam fires?


3 posted on 05/25/2014 6:41:21 PM PDT by Paladin2
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To: Paladin2

When is China going to put out their coal seam fires?
...........
I’m not sure that the USA ever put out those fires. I recall stories about them 20-30 years ago in pennsylvania. They just burn on until they run out of oxygen or coal fuel.

If the USA didn’t put out those fires, the chinese never would.


4 posted on 05/25/2014 6:58:14 PM PDT by ckilmer
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To: ckilmer

This won’t make their neighbors happy either. There is an assumption that China’s rise can be peaceful, because they never were an aggressive empire, but we are already seeing them break this assumption when it comes to energy.


5 posted on 05/25/2014 7:16:00 PM PDT by Vince Ferrer
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To: ckilmer

The Chinese don’t have to deal with the enviro-mental freak regs we imposed on ourselves. Why would they want to drop coal?


6 posted on 05/25/2014 7:18:43 PM PDT by GladesGuru (Islam Delenda Est - because of what Islam is and because of what Muslims do.)
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To: Vince Ferrer
There is an assumption that China’s rise can be peaceful, because they never were an aggressive empire

Tell that to Tibet.

7 posted on 05/25/2014 7:19:08 PM PDT by SVTCobra03 (You can never have enough friends, horsepower or ammunition.)
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To: GladesGuru
The Chinese don’t have to deal with the enviro-mental freak regs we imposed on ourselves. Why would they want to drop coal?

Because they would like to be able to continue breathing ?


8 posted on 05/25/2014 7:33:07 PM PDT by UCANSEE2 (Lost my tagline on Flight MH370. Sorry for the inconvenience.)
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To: UCANSEE2; GladesGuru

And, unfortunately, that picture is not uncommon or an exaggeration.


9 posted on 05/25/2014 7:48:10 PM PDT by Tainan (Cogito, ergo conservatus sum -- "The Taliban is inside the building")
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To: UCANSEE2
Cool picture, but you do know that it's not coal that causes that, don't you?

Homes in most of western China heat and cook with charcoal. The charcoal guy rides up every day to deliver loads of 1 kilo bricks of the stuff. When a cold snap happens, he delivers twice a day, and you have pollution like your picture. I was working in Nanjing that is powered by hydro. Not a coal burning plant in sight, but when it got cold, the streets look like your picture. It stinks too, 'cause it's not Kingsford.

10 posted on 05/25/2014 7:53:09 PM PDT by Wingy
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To: Wingy

Opps. Eastern China, not western ...


11 posted on 05/25/2014 7:55:40 PM PDT by Wingy
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To: ckilmer
the cost for a well there is four times that of a Marcellus well.

How deep are these?

The labor component must be trivial.

12 posted on 05/25/2014 7:55:42 PM PDT by Kennard
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To: ckilmer
To add insult to injury, many of the other regions where shale gas is found simply don't have the infrastructure in place to make them feasible -- be it remote locations in the Western deserts where water is extremely scarce, or in bustling urban areas that make drilling locations prohibitive.

I don’t think population density will be a problem for China when it comes to harvesting gas.

They will simply move some poor people out of the way and drill their wells.

They had no problem moving villages farmers and destroying ancient temples and other irreplaceable ancient artifacts to build the largest hydro dam in the world.

13 posted on 05/25/2014 8:07:13 PM PDT by Pontiac (The welfare state must fail because it is contrary to human nature and diminishes the human spirit.)
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To: Kennard

the cost for a well there is four times that of a Marcellus well.
.............
I can’t say that I get the logic of this article.

To begin with natural gas prices in asia are freaking 4 times that of the USA. so the usa gas prices are $4per unit gas measurement. But in China the cost is $16 per same unit gas measurement.

So what the hey if it costs more to extract natural gas. They can get much more for it.

The Marcellus gas volumes are just enormous. But Sichuan volumes according to the article are 2.5 times larger. As the article states.

“On average, production from wells drilled in the Sichuan Province, China’s most lucrative shale formation, are about 2.5 times that of a well found in America’s best shale gas play, the Marcellus.”

Well alright if the volumes are higher than the cost per unit volume is going to be lower.

Something isn’t right about the article.

My guess is that the companies doing the fracking don’t know how to do it well. Plus they are faced with all kinds of infrastructure problems.

The USA has absolutely the best infrastucture in the world for fracking yet right now there are huge bottlenecks to moving the natural gas around in the USA. Those problems would be dwarfed by the problems China faces with moving natural gas around.

China just signed a natural gas deal with russia that requries china to build 25 billion natural gas pipline from the Russian border to where ever in china. This is a really simple pipeline. Its not like they have to install thousands of feeder lines from every fracked well. All the natural gas comes from one source.

There’s something odd and awkward about the article that doesn’t make sense. The author is motivated by something he doesn’t say and he brushes over stuff he doesn’t understand.


14 posted on 05/25/2014 8:11:22 PM PDT by ckilmer
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To: ckilmer
Looks like costs may be lower:

“Relative to United States’ shale-gas plays, the [reserves] of the Sichuan and Tarim basins are potentially enormous and, if successful, could rival the Marcellus in terms of absolute scale,” Bernstein Research said recently. It also said initial well flows in the Sichuan basin appear better than expected while costs were lower than expected.

source WSJ March 26th

Also from Platt's March3rd.

15 posted on 05/25/2014 8:15:32 PM PDT by Kennard
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To: ckilmer

The Platt’s article provides a better, but bare bones, description of the challenges.


16 posted on 05/25/2014 8:19:34 PM PDT by Kennard
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To: Kennard
CNPC has taken delivery of an automated unconventional gas rig from Germany that has a maximum depth of 6,000 meters and requires only four personnel. This is one of many orders.

Why would a country with low labor cost order automated equipment?

17 posted on 05/25/2014 9:00:16 PM PDT by Kennard
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To: ckilmer

If the Chinese costs are really higher it sure in hell is not because of pay. One hand on an American derrick floor probably makes more than two or even three tours worth of Chinese.


18 posted on 05/25/2014 9:02:25 PM PDT by Rockpile
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To: Kennard
CNPC has taken delivery of an automated unconventional gas rig from Germany that has a maximum depth of 6,000 meters and requires only four personnel. This is one of many orders.

Bull Sh-t! If that were true I would order 2000 and put every drilling contractor in the United States out of business. I worked on the rigs for 17 years.

19 posted on 05/25/2014 11:50:51 PM PDT by cpdiii (Deckhand, Roughneck, Mud Man, Geologist, Pilot, Pharmacist THE CONSTITUTION IS WORTH DYING FOR!)
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To: UCANSEE2; GladesGuru; Tainan

It is entirely possible to burn coal for central station electrical generation and not have your cities look like that. Electrostatic precipitators, filter baghouses, and sulphur scrubbers are all mature technologies.


20 posted on 05/25/2014 11:58:42 PM PDT by FreedomPoster (Islam delenda est)
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To: cpdiii

Years ago I was a roughneck for a couple of summers in college, and we just had four guys “running” the rig. The driller, mud man/tower guy, and two roughnecks. And that was to about 16,000 feet.

With another crew sleeping while we worked and vice-versa. And a geologist once we were near the production zone. A cook and helper, a welder at some times, the company man some times, and a few others. Not to mention the deliveries of pipe, fuel, parts, etc. But, looking back, it was pretty amazing to have such an operation running, with not that many people really, stuck way out in the desert. (The food on the one rig was the best I ever had!)

So I guess it might depend on the definition of “running” it.


21 posted on 05/26/2014 12:01:10 AM PDT by 21twelve (http://www.freerepublic.com/focus/f-news/2185147/posts 2013 is 1933 REBORN)
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To: 21twelve; cpdiii

http://www.wassoc.com/ocean-engineering/drills

An aside: here is a firm that makes drilling rigs that require NO people. (Well, no people on the rig as it is underwater!) Lord knows how many people are on the ship above keeping everything working.

But pretty cool stuff - the can hoist it over the side, lower it down and “fly” it a certain amount to a good landing site. Then core to 100 meters using robotic “roughnecks” to add pipe, etc. The shallow rigs they use to check for cable routes, and the Japanese are using the deeper (newer) ones for methane hydrate exploration.


22 posted on 05/26/2014 12:09:09 AM PDT by 21twelve (http://www.freerepublic.com/focus/f-news/2185147/posts 2013 is 1933 REBORN)
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To: cpdiii
If that were true I would order 2000 and put every drilling contractor in the United States out of business. I worked on the rigs for 17 years.

Go to the link. I was amazed as well, but it's all there. There's no derrickhand, for example. It must cost a pretty penny.

23 posted on 05/26/2014 5:54:50 AM PDT by Kennard
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To: FreedomPoster
Electrostatic precipitators, filter baghouses, and sulphur scrubbers are all mature technologies.

Yes... but those things cost money. Money which would have to be taken away from the ruling elite or the peasants. Since the peasants have no money, that means it would have to come from the ruling elite.

Ergo...


24 posted on 05/26/2014 10:54:13 AM PDT by UCANSEE2 (Lost my tagline on Flight MH370. Sorry for the inconvenience.)
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To: Wingy
So... they burn charcoal to heat these high rise office buildings ?


25 posted on 05/26/2014 11:00:01 AM PDT by UCANSEE2 (Lost my tagline on Flight MH370. Sorry for the inconvenience.)
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To: Wingy

I disagree with your statement that it’s NOT coal.

I think it is a combination of every kind of ‘pollution’.

Coal, charcoal, sulfur, and a myriad of toxic substances emitted into the air because the Chinese have so many people that need these for energy resources, and spend very little on the ‘pollution’ aspect of the problem.


26 posted on 05/26/2014 11:03:24 AM PDT by UCANSEE2 (Lost my tagline on Flight MH370. Sorry for the inconvenience.)
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To: Tainan

I remember traveling to Los Angeles in my younger years. The smog burned my eyes. Now, it is much cleaner.

It costs money to keep from polluting the air, and the Chinese don’t want to spend the money on fixing the problem, as we did.


27 posted on 05/26/2014 11:08:53 AM PDT by UCANSEE2 (Lost my tagline on Flight MH370. Sorry for the inconvenience.)
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To: UCANSEE2

In Beijing, Shanghai, or Shenzhen those photos are largely exaggerated.


28 posted on 05/26/2014 5:53:34 PM PDT by 1010RD (First, Do No Harm)
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