China＇s Shale Gas Costs At Least Double Those in US

China will be able to meet its 2015 shale gas production targets, but at prices more than double those of the US’ biggest projects, according to analysis of one of the country's first shale gas plays. 

Research company Bloomberg New Energy Finance has examined data from the Fuling block of the Sichuan Basin, being drilled by state-owned firm Sinopec. Its analysis suggests that China has a good chance of hitting its shale gas production goal of 6.5 Bcmpa[1] (480MMcfd[2]) by 2015, but that the current wellhead cost of $11.20/MMBtu[3] is far above equivalent costs in the US, where producers can extract dry gas for as low as $3.40/MMBtu.

"However although China’s shale gas production will not be a significant new source of supply by the end of next year, its price signal and potential volume could be significant in the global market as China could use it in negotiations for pipeline and liquefied natural gas (LNG) supply."

Sinopec has made significant progress in reducing its costs at Fuling in the past two years. Average well costs have dropped from CNY 100m ($16m) in 2012 to CNY 70-80m ($11-13m) currently, and the company is targeting CNY 60m ($10m) in 2014. US prices are as much as 75% lower: $9.3m in the Haynesville, $6.0m in the Marcellus, $3.3m in the Barnett and $2.6m in the Fayetteville plays.

At $11.20/MMBtu, Fuling shale gas costs are in between two key prices for Sinopec.  The $400bn gas supply deal signed last week with Russia is likely to be higher per unit than Fuling shale gas, but Fuling costs are higher than the current tariffs that Sinopec receives for its shale gas. 

Milo Sjardin, head of Asia-Pacific for Bloomberg New Energy Finance, said: “Even though the current breakeven price is high relative to the US, it should go down with increased experience and is already substantially lower than the spot LNG price which rose as high as $18-19/MMBtu last winter. In addition, it is a domestic resource that will reduce China’s energy dependence and aid the country’s recently announced “war on pollution” so the recent success will likely result in further government support.”

(commodities-now.com  Edited by Topco)