Logistics of Delivering Supply to Market ... - The Lantau Group

Tantalizing Opportunities for Shale Gas
• The IEA estimated in March 2012 that
China has 36.1 Tcm of technically
recoverable shale gas resources
although the Ministry of Land
Resources estimates 26 Tcm, versus
US total recoverable resource of 24.4
Tcm, since reduced by the E.I.A. to
15.3 Tcm.
• The Ministry of Land and Resources
plans for 6.5 bcma of shale gas to be
produced by 2015 and 60 bcma by
2020, which is ambitious.
• First awards were four blocks
awarded to Sinopec and Henan
Provincial Coal Seam Gas
Development and Utilization
Company in June 2011, with the latter
seeking to farm out some acreage.
• Second bidding round just completed.
• Third round planned.
• PSCs and joint studies between with
majors recently got the green light
Source: IEA
Source: EIA
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Recent Shale Licence Awards – Mainly a Local Affair
Company Block Size
(Square km)
Province
Huadian Coal Industry Suiyang 1204.53 Guizhou
China Coal Geological & Engineering Fenggang 1 1053.37 Guizhou
Huaying Shanxi Energy Fenggang 2 1030.40 Guizhou
Beijing Taitantongyuan Gas Resources
Technology
Fenggang 3 1167.49 Guizhou
Tongren Energy Investment Qingong 914.63 Guizhou
Chongqing Energy Investment Qianjiang 1272.40 Chongqing
Chongqing Mineral & Resources Development Youyang East 1002.09 Chongqing
State Development and Investment Chengkou 1020.95 Chongqing
Hunan Huasheng Energy Investment and
Development
Longshan 878.00 Hunan
Shenhua Geological Survey Baojing 1189.72 Hunan
China Huadian Engineering Huayuan 400.43 Hunan
China Coal Geological Engineering Sangzhi 760.36 Hunan
Hunan Shale Gas Development Yongshun 982.23 Hunan
Huadian Hubei Power Generating Laifengxianfeng 369.23 Hubei
Huadian Hubei Power Generating Hefeng 2306.71 Hubei
Jiangxi Gas Holding Xiuwu Basin 598.28 Jiangxi
Anhui Energy Group Linan 580.09 Zhejiang
Henan Yukuang Geological Survey Wenxian 1377.91 Henan
Henan Yukuang Geological Survey Zhongmou 1395.99 Henan
• The Ministry of Land and Resources awarded
19 blocks to 16 local companies in January
2013.
• The legal classification of shale gas as a
separate “mineral resource” in late 2011
means that the current regulations that give
CNPC and SINOPEC exclusive rights for
exploration of onshore oil and gas resources
do not apply to shale gas.
• Third round is planned, but will there be any
foreign presence bringing shale expertise?
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Billion cubic meters per annum
Billion cubic metners per annum
China Gas Supply Demand Balance – Shale Makes a Late Appearance
600
Supply
600
Demand
500
500
400
400
300
300
200
200
100
100
0
0
Total LNG
Russia PNG
Myanmmar PNG
Central Asian PNG
Coal to Gas
Shale
CBM Tight Gas
Conventional Domestic
Export to Hong Kong
Residential
Transport
Others
Industry
Power
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Map of Main Trunk Pipelines
• China’s gas pipeline network
will have to expand to reach
into unconventional gas
production areas in order to
avoid becoming a
transmission becoming a
bottleneck as output
increases. As major gas
pipelines are currently run by
national oil companies,
mainly Petrochina making
access more available to
other producers will be key.
Source: EIA
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US Gas Transmission compared to China
US gas pipeline infrastructure
Inter-state pipeline length – 360,000 km
China gas infrastructure, 2012
45,000 km
~4,000 km
~4,500 km
Central Asia
Source: EIA
Source: PetroChina, news
reports and TLG analysis
US gas pipeline infrastructure is much more extensive
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Bakken – Flaring of Gas as Bright as a Major City
Source: Upstream
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Infrastructure Liberalised Markets vs China
• Open access under FERC and State rules
and laws for inter and intra state pipelines.
• Open access under EU rules, but some legal
challenges remain and fines have been
imposed on those deemed to have colluded
to restrict access.
• Negotiated third party access is more about
negotiation than access.
• The experience of Europe, USA and other
nations is that negotiations tend to be long
and drawn out.
• Negotiated access introduced in Peninsular
Malaysia – wait to see how this works out
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Third Party Access – Slow Train Coming
• Third party access also comes with a whole
package of other rules.
– Gas network code would need worked out
– Breaking up of incumbents that dominate the
market
– Gas quality needs to be standardized
– Penalties for delivering off specification gas
– Capacity booking
– Postage stamp or more likely distance related
tariff
– Entry and exit pricing
– Dispute resolution process
– Gas balancing
Source: Petrochina
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Move to Market Prices?
• According to the 12th Five-Year Plan, the
pricing regime for shale gas will be marketbased,
an important signal that the
government is willing to allow higher end-user
prices (relative to current controlled prices for
natural gas) to encourage development
• But what is a ‘market price’?
– Determined by an LNG hub (Shanghai?) with
adjustment for transmission similar to US Henry
Hub method.
– Or price determined by alternative fuels, such as
oil indexation in Europe or fuel oil times a
discount as in Southeast Asia.
– Market pricing experience in Guangdong and
Guangxi might provide pointers (60% fuel oil
and 40% LPG times 0.9, to encourage use of
piped gas).
• There are plans to roll this out to other cities.
– Bi-lateral negotiation instead of regulated price.
Wide Spread in Market Prices for Gas
Source: Nymex, UK DECC, IPE
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Upstream Gas Pricing Liberalising in China? – Who Captures the Rent?
Low Upstream Prices
No 3 rd Party Access
Market Linked Prices
• This will tend to
disincentive foreign players
in upstream sector
More Attractive Upstream
Prices
3 rd Party Access
Market Linked Prices
• This will tend incentive
foreign players in upstream
sector
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Gas Prices Higher Nearer the Coast
2012 average industrial gas price, yuan per cubic meter
CBM
Shale gas
Tight gas
Price range
3.5-5.0
2.5-3.5 -
2.0-2.5
1.5-2.0
1.5-2.0
3.5-5.0
2.5-3.5
Demand centers with
much higher regulated gas
prices than the inland
provinces
2.0-2.5
3.5-5.0
Note: Multiply Yuan/cubic meter by 4.5 to get USD/mmbtu
The unconventional gas reserve basins are located in the inland provinces that have low gas tariffs and
limited consumption growth, so getting the unconventional gas production to the coastal areas in the
cheapest way will be critical to make its economics viable
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Concession vs Production Sharing Contract - US compared to China
USA
• Flexibility comes with concession type of
systems as exist in the USA, Australia and
the UK.
• Flexibility is key for unconventionals (be
they CBM or shale) as the testing,
exploration and appraisal and development
process is a case of learning-by -doing.
• The exploration and production (E&P)
companies do not really know the exact
method, timing, or the number of wells they
will drill in any year in unconventionals..
China
• By contrast the traditional production
sharing contract (PSC) system suits
conventional oil and gas where a detailed
plan of development is finalised, approved,
built and then operated over many years to
exploit a fairly well defined oil or gas trap.
• But by their very nature CBM and shale gas
do not lend themselves to such detailed
planning ahead.
• If the PSC system is used for
unconventionals in China it will need to have
the characteristics of a royalty type
concession.
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Land Rights - USA compared to China
USA
• About 273,000 km 2 in the USA is classified
as leased shale acreage.
• In most cases the owner of the land also
owns the rights to the minerals beneath that
land.
• This allowed unfettered development of
shale gas.
• Some 6,000 (six thousand) large and small
E&P companies are involved in shale gas
exploration and production.
• Arguably resulted in inefficient build out of
infrastructure.
China
• Mineral rights granted by Ministry of Land
and Resources. A more orderly approach
might be the better solution in terms of
capital spent.
• Second bidding round awarded 19
areas/blocks to 16 local companies.
• The licenses offered in the auction consist of
20,002 km² in area and cover eight
provincial regions
• Chongqing municipality, and the provinces
of Guizhou, Hubei, Hunan, Jiangxi,
Zhejiang, Anhui, and Henan.
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Local Content and Incentives - USA and China
USA
• For example we understand that one major
is keen to bring in exactly the same
equipment that it has used in the US.
• "We've taken to China what we've learned in
shale fracing in the United States," said the
major’s CEO in recent comments. "The
geology's pretty similar. We can use the
same skills and equipment."
China
• Local content restrictions and limits on use
of foreign experts have arguably slowed
down the development of CBM in Indonesia.
• Might the same problems face shale gas in
China? Perhaps not.
• Indeed equipment used upstream in CBM
and shale gas exploration and production is
expected to get import tax credits or other
incentives.
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Geology – Still Early Days
USA
• Shale gas wells drilled in 2010 numbered
close to 3,500 and 20,000 in the last ten
years.
• This level of activity dramatically lifts the
level of knowledge of petroleum geology.
• Most shale gas in the US comes from
Barnett (TX) Haynesville (TX, LA),
Fayetteville (AR) and Marcellus (WV, PA).
China
• There have been 20 shale gas wells drilled
in China to date according to latest IEA
data.
• The Sichuan a known province of both,
conventional and unconventional natural
gas, located in the South China.
– Black shales are ubiquitous in the Paleozoic
marine formations and Mesozoic transitional
and lacustrine formations.
• It has been recognized as one of the most
promising shale gas provinces in China.
– Success will depend in part on fraccability of
the Lower Silurian Longmaxi black shale and
Lower Cambrian Qiongzusi black shale in the
Sichuan Basin and Upper Yangtze Platform,
South China.
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Let’s Not Get Too Excited Just Yet – Poland a Cautionary Tale
• Energy companies and the government were
enticed by an estimate last year from the US
Energy Information Administration, which said
Poland might hold 5.3 Tcm of shale gas – the
largest reserves in Europe.
Poland Shale Gas Basins
• However, a newer estimate by Poland’s
government geological institute cut about 90 per
cent off that, suggesting reserves of 346-768bn
cubic metres although later revising that number
to 1.93 Tcm.
• After several poor results from some exploration
wells, ExxonMobil exited from two shale gas
areas in Poland but still holds onto four others.
• Regulations and fiscal terms for exploration and
production of shale gas are being finalised, led
by the Ministry of the Environment.
• Clarity in the former and generosity in the latter
are expected.
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Source: Poland Institute of Geology

Other USA to China Comparisons
Population
Density
USA
• Not such an issue in most States
• But New York State still has a ban in
place on high volume fraccing but not on
conventional drilling.
China
• Could definitely turn out to be an issue.
• Some farmers already complaining from
conventional gas plays.
New LNG
Contracts
Regulations and
Appeals
• There is now so much gas it is now
aiming at the export market via LNG.
• FERC approval is slow in coming for
LNG exports terminals to non free trade
area countries.
• Still evolving with some conflict between
State and Federal levels and different
agencies.
• But business proceeds all the same
• In the past three years, China has not
signed much new long term LNG
contracts, possibly due to the high LNG
price and has focused on the domestic
shale gas plays and overseas equity
investment of unconventional gas and oil
assets.
• Early days for shale gas PSCs.
• Regulation processes yet to be fully
worked out.
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Putting the Jigsaw Together - Slower Paced Development of Shale gas in
China as compared with USA
Lack of third party
access
Population density
Clear pricing
for existing
transmission
Upstream player
may not see
market prices
Geology – how
many surprises
Measured
development
of resources
Upstream
prices may
not be a netback
from market prices
PSC rules clarity
Local content
rules and
Incentives
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Power
Utilities
Energy
Insight
Rigour
Value
For more information please contact us:
Neil SEMPLE
nsemple@lantaugroup.com
+852 2521 5501 (office)
www.lantaugroup.com
www.lantaugroup.com
The Lantau Group (HK) Limited
4602-4606 Tower 1, Metroplaza
223 Hing Fong Road
Kwai Fong, Hong Kong
Hong Kong
Tel: +852 2521 5501