Shale Gas Resources Drop, China Next?

            The U.S. Government today nearly halved its estimate of U.S. shale gas resources.  This follows an even more drastic decline in Poland’s shale gas resources by its national geological institute.  As China starts serious drilling of its shale gas resources, will its optimistic resource assessment also drop?

            In April 2011, the Energy Information Administration of the U.S. Department of Energy released World Shale Gas Resources:  An Initial Assessment of 14 Regions Outside of the United States. That ground-breaking study suggested that global shale gas technically recoverable resources (TRR) of 6622 trillion cubic feet (tcf) roughly equaled global proved natural gas reserves.  TRR clearly is a more speculative measure than proved reserves, which define known gas that can be economically produced with current technology.  Still, the TRR figure firmly established global shale gas as a worldwide energy sector game changer.

            World Shale Gas Resources crowned China as king with 1275 tcf of TRR, followed by the U.S. with 862 tcf, Argentina with 774 tcf, and Mexico at 681.  The study found the largest shale gas resources in Europe in Poland (187 tcf) and France (180 tcf).

             In its 2012 Annual Energy Outlook, released today (June 25), the EIA lowered its estimate of U.S. shale gas TRR to 482 tcf—a 44 percent decline.  The fall resulted largely from a 67 percent drop in EIA’s estimate of TRR in the 100,000 square mile Marcellus shale that spreads across eight states from Tennessee to New York, but with most drilling in Pennsylvania and West Virginia.  (New York imposed a moratorium on shale gas exploitation, pending an environmental assessment.)  EIA followed a revision by the U.S. Geological Survey of the Marcellus shale.  EIA emphasized that further drilling could result in a future upward revision of resources and that the lower TRR does not directly correlate to projected production.

            The Polish Geological Institute announced its Assessment of shale gas and shale oil resources in Poland—First report on March 21.  The PGI emphasized that the report should be considered only a conservative, initial estimate as it was based on 39 wells drilled between 1950 and 1990.  Still, Minister Piotr Woźniak, Poland’s Chief Geologist, noted that only 22 wells had been completed since 2010 and a mere 14 were planned for 2012, compared to the thousands drilled annually in the U.S.  The PGI estimated the most probable level of Polish shale gas resources between 346.1 billion cubic metres (12.2 tcf) and 767.9 bcm (27.1 tcf).  Even the high end of the range is 85.5 percent lower than EIA’s estimate in World Shale Gas Resources a year earlier.  Last week the Gazeta Wyborcza reported that ExxonMobil would abandon its shale gas exploration projects in Poland after test wells failed to produce commercial results.

            So back to China.  Already in March 2012, China’s Ministry of Land and Resources scaled back its estimate of the country’s shale gas TRR from 31 tcm (1095 tcf) to 25.1 tcm (886 tcf) based on its most extensive appraisal to date.  The MLR noted that the complicated geology of its shale gas reserves and the relative inexperience of its companies would make shale gas production difficult.  Others have cited China’s regulatory regime, including administrative (versus market) pricing of gas, the lack of pipeline infrastructure, and the fact that some of China’s large shale gas resources, such as those in Xinjiang, are in semi-arid areas, as potential impediments.  Nonetheless, the government of China has moved forward on leasing shale gas tracts.  China’s big three—China National Petroleum Corp./PetroChina, China National Offshore Oil Corp. and Sinopec—all have purchased North American shale gas assets to learn the technology and have brought in Shell, Chevron, BP and others to work Chinese basins.

            China’s current Five Year Plan calls for production of 6.5 bcm (230 bcf) by 2015 from 19 major shale gas regions across the country.  By 2020, China’s National Development and Planning Commission expects shale gas production to jump to between 60 and 100 bcm (2 to 3.5 trillion cubic feet). 

            Whether or not China meets its ambitious shale gas production plans, the U.S. and Polish cases suggest that further drilling in China may well mean further reductions in the estimates of China’s overall shale gas resource.