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.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.?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中国一次能源消耗量

Source: BP Statistical Review of World Energy 2012

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

China has huge shale gas resources

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

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http://news.nationalgeographic.com/news/energy/2012/08/120808-china-shale-gas/http://www.cuog.cn/en/news/201301298153.htmlhttp://www.cuog.cn/en/research/201206017555.html

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

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 2.3http://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-reformhttp://www.mondaq.com/unitedstates/x/217828/Oil+Gas+Electricity/China+Issues+New+Natural+Gas+Utilization+Policyhttp://www.chinadaily.com.cn/business/2012-11/15/content_15933183.htm

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