Conversations On Sichuan Shale

By Tien Shiao, Ranping Song 10 March, 2014

Shiao & Song from WRI, using Sichuan as an example, evaluate the feasibility of China's Shale gas ambitions, Shiao & Song from WRI, using Sichuan as an example, evaluate the feasibility of China's Shale gas ambitions, Shiao & Song from WRI, using Sichuan as an example, evaluate the feasibility of China's Shale gas ambitions

China’s underground shale formations hold more natural gas than any other country in the world. If methane leaks and emissions are managed, that shale gas is theoretically an abundant lower-carbon fuel that could power China’s booming population and industrial growth, reduce the country’s fossil fuel import burden, and bolster its economy.

But China’s shale gas production is still in its infancy. So, in its most recent national policy agenda – called the 12^th five year plan – China’s government set a target for shale gas production by 2015: 6.5 billion cubic meters. That number, as high as it is, would still be only a fraction of the United States’ shale production, which totaled 239 billion cubic meters in 2011 alone.

“Sichuan’s shale will depend on scarce and sometimes polluted water supplies… face resistance from local communities … and will be expensive to recover”

Thirteen provinces have been selected as priority areas for shale gas development. Mountainous Sichuan province, in southwest China, contains more shale reserves than any other. But Sichuan’s shale will depend on scarce and sometimes polluted water supplies, likely face resistance from local communities, and will be especially expensive to recover from under the province’s rugged terrain.

Sichuan, therefore, is an instructive case study for the promise and the pitfalls around shale gas development in China, since other provinces could face similar challenges as they develop their own shale reserves.

The Challenges

Aiming to understand more about the opportunities and challenges for Sichuan’s shale gas, the World Resources Institute, Natural Resources Defense Council (NRDC) and China 5e, an energy information consultancy, recently visited Chengdu, Sichuan.

“An estimated 17-20 percent of all of China’s shale gas hides under Sichuan”

This group found that the provincial government is placing high hopes on shale. By 2015, the government expects to explore eight development zones and reach 3 billion cubic meters of shale gas production—just less than half of China’s nationwide 6.5 billion cubic meter target. It is an ambitious beginning if realized – an estimated 17-20 percent of all of China’s shale gas hides under Sichuan. The government also has plans to strengthen exploration, technology research and development, environmental protection, transportation as well as fiscal policies to support shale gas development.

Both the government and industry representatives highlighted these challenges facing Sichuan’s current shale gas operations.

• The terrain is rocky and mountainous. Larger investments are needed to drill wells and transport and store gas. Although the cost is expected to come down, drilling one hydraulic fracking well costs an estimated $ RMB 50 million, or $US 8 million. That’s at the lower end of China’s estimated $US 5 million to $US 12 million ($RMB 30.6 million – $RMB 73.4 million) per well cost range, but it’s still far more expensive than the $US 2.7- $US 3.7 million average per-well cost in the United States.
• The total amount of technically recoverable shale gas reserves is highly uncertain. Some experts warn that existing, cost-effective drilling equipment might only be able to tap one-fifth of the current estimated volume, making infrastructure investment such as pipeline and roads risky.
• Conventional hydraulic fracking is very water intensive. One well requires an estimated 40,000 metric tons of water, or more. Although Sichuan has abundant water resources, actual availability fluctuates widely because of the seasonal variability of rainfall as well as the differences in water distribution across the region. Drilling will compete with other water users for freshwater resources, especially irrigated agriculture, which poses challenges for a province with 80 million people.
• Officials noted that there are inadequate guidelines and standards in place to safeguard the environment during shale gas development. For example, there is no standard for flow back water re-use and discharge. Even a moderate amount of pollutants will add to existing surface water pollution, making it harder for Sichuan to meet its surface water pollution standards.
• Officials also noted that there is no effective environmental protection regulation. Up until now, a series of environmental regulations have applied to China’s oil and gas industry, but it is unclear whether and how these regulations apply to shale and unconventional gas. Sichuan province’s environmental protection bureaus have no mandate, access, nor enough funding to regulate the shale gas and unconventional gas sector. As the shale gas industry has many new entrants in China, environmental regulation is expected to be even more challenging.
• Last but not the least, man-induced mini-earthquakes from shale gas development pose a serious threat to a province that has experienced two major earth quakes in just five years.

If it chooses not to address these challenges, Sichuan will cause long-lasting environmental harm and health and safety risks to local communities.

Three initial steps could move Sichuan officials down a more responsible path.

1. The provincial government could consider international cooperation that includes collaborative research on the details of the shale resource to provide better estimates of shale gas production. This would allow companies to plan more effectively for the infrastructure needed for future exploration and development, and it would allow groups such as WRI’s Aqueduct project to make assessments of Sichuan’s water supply constraints for shale gas development.
2. The provincial government should take into account water scarcity constraints, water pollution, and greenhouse gas emissions to reduce environmental impact during shale gas development.
3. The government should set up an effective regulatory framework to mitigate environmental risks.

“By the end of 2013, WRI’s Aqueduct project will complete a global shale gas water risk assessment”

WRI is working on two projects that may help improve decision making. By the end of 2013, WRI’s Aqueduct project will complete a global shale gas water risk assessment highlighting water constraints to shale gas plays globally, featuring publicly available data. By the end of 2014, WRI, in collaboration with NRDC and China 5e, will identify the needs and challenges of shale gas development in China and suggest environmental guidelines based on international experience.

Sichuan may have the largest percentage of shale reserves in the country with the world’s largest total reserves, but even its ambitious 2015 targets are a small start. Annual production of 6.5 billion cubic meters would still only be small fraction, not only of the United States’ capacity, but of the estimated 36 trillion cubic meters of gas buried under Chinese soil. Whether Sichuan province, and China as a whole, can develop environmental regulation framework to manage the significant economic, environmental, and social risks associated with shale gas development remains to be seen.

Andrew Maddocks and Sarah Forbes contributed to this piece.

Further Reading

• Is Fracking the Solution for Water Scarce China – Will water limit China’s access to possibly the world’s largest resoure of shale gas? Lisa Genasci discusses China’s possible energy alternative and its hold-backs
• Groundwater Crackdown: Hope Springs – The economy slows down but the Chinese government speeds up groundwater crackdown with increased transparency, blacklists at both central and provincial levels
• Cancer Villages: Toxic Tipping Point? – With official recognition of cancer villages in 2013, we reviewed 255 media reports of such villages to look at their spread and industries that may be responsible. Is this the start of a long costly road to clean up?