Logistics of Delivering Supply to Market Midstream Infrastructure 3 rd Unconventional Oil and Gas Summit - Chengdu Neil Semple April 2013

Transcription

1 Logistics of Delivering Supply to Market Midstream Infrastructure 3 rd Unconventional Oil and Gas Summit - Chengdu Neil Semple April 2013

2 Outline and Summary Scale of Resources and Licencing Supply and Demand Pipelines Third Party Access Upstream Pricing USA and China Shale Gas Comparisons Putting the Jigsaw Together Source Journal of Petroleum Technology 1

3 Tantalizing Opportunities for Shale Gas The IEA estimated in March 2012 that China has 36.1 Tcm of technically recoverable shale gas resources although the Ministry of Land Resources estimates 26 Tcm, versus US total recoverable resource of 24.4 Tcm, since reduced by the E.I.A. to 15.3 Tcm. The Ministry of Land and Resources plans for 6.5 bcma of shale gas to be produced by 2015 and 60 bcma by 2020, which is ambitious. First awards were four blocks awarded to Sinopec and Henan Provincial Coal Seam Gas Development and Utilization Company in June 2011, with the latter seeking to farm out some acreage. Second bidding round just completed. Third round planned. PSCs and joint studies between with majors recently got the green light Source: IEA Source: EIA 2

4 Recent Shale Licence Awards Mainly a Local Affair Company Block Size (Square km) Province Huadian Coal Industry Suiyang Guizhou China Coal Geological & Engineering Fenggang Guizhou Huaying Shanxi Energy Fenggang Guizhou Beijing Taitantongyuan Gas Resources Technology Fenggang Guizhou Tongren Energy Investment Qingong Guizhou Chongqing Energy Investment Qianjiang Chongqing Chongqing Mineral & Resources Development Youyang East Chongqing State Development and Investment Chengkou Chongqing Hunan Huasheng Energy Investment and Development Longshan Hunan Shenhua Geological Survey Baojing Hunan China Huadian Engineering Huayuan Hunan China Coal Geological Engineering Sangzhi Hunan Hunan Shale Gas Development Yongshun Hunan Huadian Hubei Power Generating Laifengxianfeng Hubei Huadian Hubei Power Generating Hefeng Hubei Jiangxi Gas Holding Xiuwu Basin Jiangxi Anhui Energy Group Linan Zhejiang Henan Yukuang Geological Survey Wenxian Henan Henan Yukuang Geological Survey Zhongmou Henan The Ministry of Land and Resources awarded 19 blocks to 16 local companies in January The legal classification of shale gas as a separate mineral resource in late 2011 means that the current regulations that give CNPC and SINOPEC exclusive rights for exploration of onshore oil and gas resources do not apply to shale gas. Third round is planned, but will there be any foreign presence bringing shale expertise? 3

5 Billion cubic meters per annum Billion cubic metners per annum China Gas Supply Demand Balance Shale Makes a Late Appearance 600 Supply 600 Demand Total LNG Russia PNG Myanmmar PNG Central Asian PNG Coal to Gas Shale CBM Tight Gas Conventional Domestic Export to Hong Kong Residential Transport Others Industry Power 4

6 Map of Main Trunk Pipelines China s gas pipeline network will have to expand to reach into unconventional gas production areas in order to avoid becoming a transmission becoming a bottleneck as output increases. As major gas pipelines are currently run by national oil companies, mainly Petrochina making access more available to other producers will be key. Source: EIA 5

7 US Gas Transmission compared to China US gas pipeline infrastructure Inter-state pipeline length 360,000 km China gas infrastructure, ,000 km ~4,000 km ~4,500 km Central Asia Source: EIA Source: PetroChina, news reports and TLG analysis US gas pipeline infrastructure is much more extensive 6

8 Bakken Flaring of Gas as Bright as a Major City Source: Upstream 7

9 Infrastructure Liberalised Markets vs China Open access under FERC and State rules and laws for inter and intra state pipelines. Open access under EU rules, but some legal challenges remain and fines have been imposed on those deemed to have colluded to restrict access. Negotiated third party access is more about negotiation than access. The experience of Europe, USA and other nations is that negotiations tend to be long and drawn out. Negotiated access introduced in Peninsular Malaysia wait to see how this works out 8

10 Third Party Access Slow Train Coming Third party access also comes with a whole package of other rules. Gas network code would need worked out Breaking up of incumbents that dominate the market Gas quality needs to be standardized Penalties for delivering off specification gas Capacity booking Postage stamp or more likely distance related tariff Entry and exit pricing Dispute resolution process Gas balancing Source: Petrochina 9

11 Move to Market Prices? According to the 12th Five-Year Plan, the pricing regime for shale gas will be marketbased, an important signal that the government is willing to allow higher end-user prices (relative to current controlled prices for natural gas) to encourage development But what is a market price? Determined by an LNG hub (Shanghai?) with adjustment for transmission similar to US Henry Hub method. Or price determined by alternative fuels, such as oil indexation in Europe or fuel oil times a discount as in Southeast Asia. Market pricing experience in Guangdong and Guangxi might provide pointers (60% fuel oil and 40% LPG times 0.9, to encourage use of piped gas). There are plans to roll this out to other cities. Bi-lateral negotiation instead of regulated price. Wide Spread in Market Prices for Gas Source: Nymex, UK DECC, IPE 10

12 Upstream Gas Pricing Liberalising in China? Who Captures the Rent? Low Upstream Prices No 3 rd Party Access Market Linked Prices This will tend to disincentive foreign players in upstream sector More Attractive Upstream Prices 3 rd Party Access Market Linked Prices This will tend incentive foreign players in upstream sector 11

13 Gas Prices Higher Nearer the Coast 2012 average industrial gas price, yuan per cubic meter CBM Shale gas Tight gas Price range Demand centers with much higher regulated gas prices than the inland provinces Note: Multiply Yuan/cubic meter by 4.5 to get USD/mmbtu The unconventional gas reserve basins are located in the inland provinces that have low gas tariffs and limited consumption growth, so getting the unconventional gas production to the coastal areas in the cheapest way will be critical to make its economics viable 12

14 Concession vs Production Sharing Contract - US compared to China USA Flexibility comes with concession type of systems as exist in the USA, Australia and the UK. Flexibility is key for unconventionals (be they CBM or shale) as the testing, exploration and appraisal and development process is a case of learning-by -doing. The exploration and production (E&P) companies do not really know the exact method, timing, or the number of wells they will drill in any year in unconventionals.. China By contrast the traditional production sharing contract (PSC) system suits conventional oil and gas where a detailed plan of development is finalised, approved, built and then operated over many years to exploit a fairly well defined oil or gas trap. But by their very nature CBM and shale gas do not lend themselves to such detailed planning ahead. If the PSC system is used for unconventionals in China it will need to have the characteristics of a royalty type concession. 13

15 Land Rights - USA compared to China USA About 273,000 km 2 in the USA is classified as leased shale acreage. In most cases the owner of the land also owns the rights to the minerals beneath that land. This allowed unfettered development of shale gas. Some 6,000 (six thousand) large and small E&P companies are involved in shale gas exploration and production. Arguably resulted in inefficient build out of infrastructure. China Mineral rights granted by Ministry of Land and Resources. A more orderly approach might be the better solution in terms of capital spent. Second bidding round awarded 19 areas/blocks to 16 local companies. The licenses offered in the auction consist of 20,002 km² in area and cover eight provincial regions Chongqing municipality, and the provinces of Guizhou, Hubei, Hunan, Jiangxi, Zhejiang, Anhui, and Henan. 14

16 Local Content and Incentives - USA and China USA For example we understand that one major is keen to bring in exactly the same equipment that it has used in the US. "We've taken to China what we've learned in shale fracing in the United States," said the major s CEO in recent comments. "The geology's pretty similar. We can use the same skills and equipment." China Local content restrictions and limits on use of foreign experts have arguably slowed down the development of CBM in Indonesia. Might the same problems face shale gas in China? Perhaps not. Indeed equipment used upstream in CBM and shale gas exploration and production is expected to get import tax credits or other incentives. 15

17 Geology Still Early Days USA Shale gas wells drilled in 2010 numbered close to 3,500 and 20,000 in the last ten years. This level of activity dramatically lifts the level of knowledge of petroleum geology. Most shale gas in the US comes from Barnett (TX) Haynesville (TX, LA), Fayetteville (AR) and Marcellus (WV, PA). China There have been 20 shale gas wells drilled in China to date according to latest IEA data. The Sichuan a known province of both, conventional and unconventional natural gas, located in the South China. Black shales are ubiquitous in the Paleozoic marine formations and Mesozoic transitional and lacustrine formations. It has been recognized as one of the most promising shale gas provinces in China. Success will depend in part on fraccability of the Lower Silurian Longmaxi black shale and Lower Cambrian Qiongzusi black shale in the Sichuan Basin and Upper Yangtze Platform, South China. 16

18 Let s Not Get Too Excited Just Yet Poland a Cautionary Tale Energy companies and the government were enticed by an estimate last year from the US Energy Information Administration, which said Poland might hold 5.3 Tcm of shale gas the largest reserves in Europe. Poland Shale Gas Basins However, a newer estimate by Poland s government geological institute cut about 90 per cent off that, suggesting reserves of bn cubic metres although later revising that number to 1.93 Tcm. After several poor results from some exploration wells, ExxonMobil exited from two shale gas areas in Poland but still holds onto four others. Regulations and fiscal terms for exploration and production of shale gas are being finalised, led by the Ministry of the Environment. Clarity in the former and generosity in the latter are expected. 17 Source: Poland Institute of Geology

19 Other USA to China Comparisons Population Density USA Not such an issue in most States But New York State still has a ban in place on high volume fraccing but not on conventional drilling. China Could definitely turn out to be an issue. Some farmers already complaining from conventional gas plays. New LNG Contracts Regulations and Appeals There is now so much gas it is now aiming at the export market via LNG. FERC approval is slow in coming for LNG exports terminals to non free trade area countries. Still evolving with some conflict between State and Federal levels and different agencies. But business proceeds all the same In the past three years, China has not signed much new long term LNG contracts, possibly due to the high LNG price and has focused on the domestic shale gas plays and overseas equity investment of unconventional gas and oil assets. Early days for shale gas PSCs. Regulation processes yet to be fully worked out. 18

20 Putting the Jigsaw Together - Slower Paced Development of Shale gas in China as compared with USA Lack of third party access Population density Clear pricing for existing transmission Upstream player may not see market prices Geology how many surprises Measured development of resources Upstream prices may not be a netback from market prices PSC rules clarity Local content rules and Incentives 19

21 Power Utilities Energy Insight Rigour Value For more information please contact us: Neil SEMPLE (office) (HK) Limited Tower 1, Metroplaza 223 Hing Fong Road Kwai Fong, Hong Kong Hong Kong Tel: