China’s Unconventional Gas Resources

China’s Energy Policies International Energy & Transactions Committee Brown Bag Harry Vidas Vice President, Fuels [email protected]

(703) 218-2745 May 13, 2013

Disclaimer

Warranties and Representations.

ICF endeavors to provide information and projections consistent with standard practices in a professional manner. ICF MAKES NO WARRANTIES, HOWEVER, EXPRESS OR IMPLIED (INCLUDING WITHOUT LIMITATION ANY WARRANTIES OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE), AS TO THIS PRESENTATION. Specifically but without limitation, ICF makes no warranty or guarantee regarding the accuracy of any forecasts, estimates, or analyses, or that such work products will be accepted by any legal or regulatory body.

Waivers.

Those viewing this presentation hereby waive any claim at any time, whether now or in the future, against ICF, its officers, directors, employees or agents arising out of or in connection with this presentation. In no event whatsoever shall ICF, its officers, directors, employees, or agents be liable to those viewing this presentation. © 2013 ICF International. All rights reserved.

2

Contents

Overview

Shale Gas Development Shale Gas Development Impediments Gas Pipeline Infrastructure LNG Imports and Shale Development Impact Conclusion © 2013 ICF International. All rights reserved.

3

Overview – China’s Shale Estimate

48 Major Shale Gas Basins in 32 Countries

 According to the U.S. EIA, global technically recoverable shale gas resources (based on assessment in 32 countries) total 6,622 Tcf, the equivalent of 60 years of 2008 worldwide natural gas consumption. More accurate number would be 12,000 Tcf for whole world.

 The EIA estimates that China holds 1,275 Tcf in recoverable shale gas

Overview – Shale Gas Production Technologies

Hydraulic Fracturing Process Conventional and Shale Gas Resources

 Horizontal drilling and hydraulic fracturing have unlocked previously inaccessible shale gas resources  Shale gas production has steadily risen over the past decade through use of these upstream technologies (U.S. shale gas production now makes up 33% of total U.S. gas production)  Shale gas wells are drilled 8,000-12,000 feet down and then laterally 3,000-10,000 feet

Contents

Overview

Shale Gas Development

Shale Gas Development Impediments Gas Pipeline Infrastructure LNG Imports and Shale Development Impact Conclusion © 2013 ICF International. All rights reserved.

6

Shale Gas Development – Shale/ CBM Basins

 China has seven major onshore shale basins thought to contain shale gas, just two (Sichuan in the southeast and Tarim to the northwest) are suited for near-term commercial development.

 China’s shale and CBM basins are widely distributed, China’s shale gas production remains limited to experimental well drilling in the Sichuan basin, with aggressive plans for future development.  Current activity in Sichuan Basin (60 shale gas wells completed).

7

Shale Gas Development – Current Estimates

 Shale, tight, and coalbed methane  Some areas also have tight oil potential (including Ordos Basin)  Most of the resource is in Sichuan Basin region; similar geologic age to Marcellus Shale

Region

Yangtze Region Northern China Northwestern China Western China

Total Basins

Sichuan, Yunnan, Jiangnan Ordos, Bohai Junggar, Turpan Tarim

Basin Type

Cratonic Cratonic Foreland Depression

Age

S, D C, P P, J K, N

Area (sq km)

900,000 600,000 700,000 500,000

8 Mean Recoverable (Tcf)

447 191 206 212

1,056

Shale Gas Development – Current Status

 Most current/near term activity in Sichuan Basin  60+ shale gas completions to date; no commercial production, but commercial scale well rates (up to 5 MMcfd for horizontals and 1.5 MMcfd verticals) achieved.

  Government forecasts of up to 2.8 Tcf shale production by 2020; “large scale” commercial prod. forecast by EOY 2015 SINOPEC plans 38 MMcfd of shale gas by 2014 

Date

Oct-07 Nov-09 Jan-10

International Companies NOCs Activity

Newfield Shell BP May-09 3Q 2010 Statoil Conoco Phillips

Location/Basin Status

CNPC Shale gas joint study Weiyuan Block, Sichuan Completed in 2008 CNPC Shale gas joint assessment Fushun Yuangchuan Bock, Sichuan Ongoing Sinopec Shale gas joint assessment Kaili Block, Guizhou; Huangqiao Block, Ongoing Jiangsu CNPC Shale gas joint study Sichuan Negotiation CNPC Shale gas Sichuan Pening  Sinopec CNPC Shale gas exploration Longli Counti, Guizhou Tight/shale gas exploration Jinqiu Block, Sichuan Ongoing Ongoing Sinopec Shale gas joint study Wuzhishan-Meigu Ongoing Block, Sichuan Sinopec MOU covering shale gas N/A N/A

9

Shale Gas Development – Production Forecasts

   China’s natural gas use made up 4 percent of the energy mix in 2011, though the most recent 12 th five-year plan has a goal to increase the share of natural gas to 10 percent by 2020.

Demand currently exceeding production Government forecast of 8 Tcf/y demand by 2015 (5 year plan)   China’s National Energy Administration has a goal of annual shale gas production of 228 bcf (6.5 bcm) by 2015 and 2.1 Tcf (60 bcm) by 2020, an ambitious goal, given the experimental stage of Chinese shale gas drilling and the technological/geological issues Production of China’s unconventionals could alter the recent dynamic of increasing LNG imports

10

Contents

Overview Shale Gas Development

Shale Gas Development Impediments

Gas Pipeline Infrastructure LNG Imports and Shale Development Impact Conclusion © 2013 ICF International. All rights reserved.

1 1

Shale Gas Development Impediments

Potential challenges to shale gas production include limited pipeline access, water access, limited technical knowhow, lack of sufficient regulatory enforcement, and geological issues (e.g., deeper formations than those in the U.S.)       Topography Depth Non-marine in NE areas Water availability Population density Infrastructure

Environmental Issues

 Water: fracking fluid content, chemical use/reporting, groundwater contamination, excessive water use, wastewater treatment/disposal  Air emissions and climate: methane leakage, other VOCs, drilling equipment emissions,  Lifecycle emissions: methane emissions limit environmental gains from natural gas use  Wellhead prices

Contents

Overview Shale Gas Development Shale Gas Development Impediments

Gas Pipeline Infrastructure

LNG Imports and Shale Development Impact Conclusion © 2013 ICF International. All rights reserved.

1 3

Gas Pipeline Infrastructure – Total Pipelines

As of 2010, China’s total gas pipeline mileage totaled 24,000 miles, which includes a gas pipeline network from Kazakhstan that connects to the West-East pipeline from Kazakhstan to Shanghai, a substantial source of gas for China. China has plans to develop other West-East pipelines, as well.

 Gas pipelines are owned by the state  Shale gas likely to require new lines/expanded capacity  CNCP controls pipelines; may not allow third party access

Source: EIA, 2012

Gas Pipeline Systems 14

Contents

Overview Shale Gas Development Shale Gas Development Impediments Gas Pipeline Infrastructure

LNG Imports and Shale Development Impact

Conclusion © 2013 ICF International. All rights reserved.

1 5

LNG Imports – Terminals

LNG Import Terminals in China

Source: Poten & Partners, 2010

2012

Imports 1.9 bcfd Existing terminal capacity 2.9 bcfd 2.1 bcfd now under construction.

16

Adding in planned terminals would bring total capacity [E+UC+P] to 11.2 bcfd.

LNG Imports – Global LNG Trade Forecasts

90 World LNG Demand Forecasts Historical World LNG Imports by Region (2004-2011) 35 80 Facts Global ICF Range 30 25 70 CERI Poten 20 60 15 JKT 50 Credit S.

10 40 5 Europe 30 2011 2015 2020 2025 2030 2035 0 2004 2005 North America 2006 2007 2008 2009 2010

 LNG import demand exceeded 30 Bcfd in 2011, and is expected to grow another 39 to 57 Bcfd by 2035. Wide range of estimates on China’s LNG demand.

2011

LNG Imports – Global LNG Trade Forecasts

Supply Curve of LNG Supply Projects under Construction or Proposed

$15 $14 $13 $12 $11 $10 $9 $8 $7 $6 $5 $4 All Non US US 10 20 30 40 50

Bcfd of LNG Export

60 70 80  Globally, roughly 63 non-U.S. LNG export projects are underway or in the planning phase, with an estimated total capacity of 50.5 Bcfd; other projects are expected, as well  Just as U.S. unconventional production is expected to make a significant impact on global LNG markets, China’s successful unconventionals development could fundamentally alter global LNG trends.

Contents

Overview Shale Gas Development Shale Gas Development Impediments Gas Pipeline Infrastructure LNG Imports and Shale Development Impact

Conclusion

© 2013 ICF International. All rights reserved.

1 9

Conclusion

 China’s current estimates for unconventional gas resources are significant, with current development seen in selected basins  Successful development of China’s unconventional natural gas resources could alter the country’s energy mix and international LNG trade trends, similar to trends seen in U.S. gas development  However, China’s energy growth needs and low starting base for natural gas consumption could mean limited effects on international natural gas trends, as domestic demand could still significantly outpace domestic production  Impediments, including water usage and geological uncertainties mean that China’s successful unconventional gas development remains unclear