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Mark Cronshaw, Gustavson Associates

ECONOMIC DECISION-MAKING AND RISK MANAGEMENT FOR CHINA’S SHALE PLAYS 中国页岩气开发中的经济决策与风险管理 SHALE TECH CHINA BEIJING MARCH 28, 2013. Mark Cronshaw, Gustavson Associates. Shale Gas Success in the U.S. 美国页岩气的成功.

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Mark Cronshaw, Gustavson Associates

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  1. ECONOMIC DECISION-MAKING AND RISK MANAGEMENT FOR CHINA’S SHALE PLAYS中国页岩气开发中的经济决策与风险管理SHALE TECH CHINABEIJING MARCH 28, 2013 Mark Cronshaw, Gustavson Associates

  2. Shale Gas Success in the U.S.美国页岩气的成功 http://www.bondvigilantes.com/blog/2013/02/20/europe-china-and-shale-gas-euphoria-or-rejection/

  3. Large U.S. Supply Yields Low U.S. Price美国大量页岩气供给与低廉价格 http://www.bondvigilantes.com/blog/2013/02/20/europe-china-and-shale-gas-euphoria-or-rejection/

  4. Can China copy (or better) the U.S.?中国是否能效仿（超越）美国？ • Demand • What is demand for gas? • Supply • Resource? • Technology • Water availability • Infrastructure • Transmission • Distribution • Economics • Production decline • Costs – capital and operating • Wellhead price • Fiscal terms

  5. Brief History of Shale Gas in China中国页岩气开发历史 • April 2010 PetroChina drills first (vertical) shale gas well (Wei-201) • March 2011 Petrochina completes first horizontal well • TD 2800m • Horizontal section > 1000m • 11 frac stages • 2011 PetroChina drills 7 additional shale gas wells • Yang-201 flowed up to 430,000 CM/d http://business.financialpost.com/2013/01/17/china-offers-greatest-prize-of-all-for-shale-gas/?__lsa=e123-d999

  6. Primary Energy Consumption in China中国一次能源消耗量 Source: BP Statistical Review of World Energy 2012

  7. Motivations for Shale Gas in China为什么中国要开发页岩气？ • Demand for energy is increasing rapidly • Natural gas generates electricity with half the carbon dioxide emissions of coalhttp://news.nationalgeographic.com/news/energy/2012/08/120808-china-shale-gas/ • China has huge shale gas resources

  8. China Gas Production and Consumption中国页岩气的生产与消耗 Sources: BP Statistical Review of World Energy 2012 & Platts • 2015 planned shale gas production in China: 6.5 billion CM • June 2012 Sinopec started drilling 9 shale gas wells in Chongqing • Sinopec plans 300 to 400 million CM shale gas production in 2014 • PetroChina targets 1 billion CM shale gas production in 2015 http://news.nationalgeographic.com/news/energy/2012/08/120808-china-shale-gas/ http://www.cuog.cn/en/news/201301298153.html http://www.cuog.cn/en/research/201206017555.html

  9. Other Natural Gas Sources其他天然气资源 • Pipeline imports and LNG ($13-17/MCF) • Syngas, from coal ($7-8/MCF) • 2015 forecast 16 BCM/yr • 2020 forecast 55 to 130 BCM/yr • Sinopec plans two syngas pipelines (30 BCM/yr each) • Coal bed methane (forecast 20 BCM/yr by 2020) • China spent $17 billion on gas imports in 2012 http://blogs.platts.com/2013/01/03/china_2013/ www.bloomberg.com/news/print/2013-02-19/china-s-shale-gas-no-revolution-as-price-imperils-output-energy.html

  10. Unconventional Gas Basins in China中国非常规气盆地 • Tarim basin is very dry – limited water Marine deposits Source: Gas Pricing and Regulation, IEA, 2012

  11. Shale Gas Resources in China中国页岩气资源 • Technically recoverable shale gas 36 trillion m3 (EIA)> 200 year supply at current consumption http://www.cges.co.uk/resources/articles/2012/02/07/shale-gas-discovery-in-china

  12. Property Rights 矿权 • Sichuan basin • PetroChina/Shell • Sinopec/Conoco/Chevron • First auction June 2011 • 6 bidders for 4 blocks • 2 blocks awarded • Second auction Oct. 2012 • 20 gas reserve blocks in eight provincial regions • 20,002 square kilometers • 83 bidders http://energyinasiablog.com/ http://www.chinadaily.com.cn/business/2012-11/15/content_15933183.htm

  13. Natural Gas Infrastructure 天然气基础设施 Expected new construction by 2015 • Over 40,000 km of gas pipelines • 50 billion CM/year capacity • 20 billion CM/year of gas storage capacity • Link producing regions (western and central China) to population centers (coastal/eastern regions) Gas Pricing and Regulation, IEA, 2012 http://www.platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/7305076

  14. Technological Uncertainties技术不确定因素 • Conventional gas – • Will you find hydrocarbons? • Shale gas • What is the best completion technology • How will production rate decline over time? • Environmental impact http://www.online-advice-service.com/environment/archives/479

  15. Shale Gas Challenges 页岩气挑战 • Large water needs • Water contamination risks • Surface spills • Fracking contamination • Rugged surface terrain • Frack design • Economics • Lack of gas pipelines

  16. Fracking 压裂 • Fracking: about 20 million liters of water per well • Concerns about water disposal • Poor well cement jobs can cause problems • Shales in China tend to have more clay than in U.S. • Possible future fracking technologies • More recycled water, new water treatment methods • Replace most water with fine flowing particles • Fracking computer simulations http://www.technologyreview.com/news/508146/china-has-plenty-of-shale-gas-but-it-will-be-hard-to-mine/ http://www.technologyreview.com/news/428076/can-fracking-be-cleaned-up/

  17. US Production Experience 美国开发经验 • Wide range of production rates • Rapid production rate declines in all cases SPE 135555 “Shale Gas Production Decline …”, Baihly et al, Schlumberger

  18. Technology Partnerships 技术合作 • Feb. 2013 CNOOC acquires Nexen ($15.1B)http://www.foxbusiness.com/news/2013/02/26/cnooc-completes-nexen-buy-news-follows-sinopec-chesapeake-deal/ • Shale gas reserves in British Columbia • Feb. 2013 China Petrochemical Corp (Sinopec) agrees to buy 50% stake in Chesapeake’s Mississippi Lime venture ($1B)http://www.foxbusiness.com/news/2013/02/26/cnooc-completes-nexen-buy-news-follows-sinopec-chesapeake-deal/ • Feb. 2012 PetroChina invests in Shell’s Groundbirch shale gas project (Canada) • Jan. 2012 Sinopec JV with Devon Energy ($2.5B)http://news.nationalgeographic.com/news/energy/2012/08/120808-china-shale-gas/ • 2010 & 2011 CNOOC invests in Chesapeake shale oil ($3B) • Shell/CNOOC joint venture • BP/Sinopec, Total/CNPC, and Shell/PetroChina drilled in Sichuan province http://energyinasiablog.com/2012/05/11/3-reasons-why-shale-gas-is-a-pipe-dream-in-china-part1/

  19. Natural Gas Pricing – 1天然气定价－1 • Ex-plant gas prices and pipeline transmission fee set by National Development and Reform Commission (NDRC) • City gas distribution fee set by local governments • Dec. 2011 - NDRC announced natural gas price reform pilot scheme in S. Guangdong & Guanxi provinces • City gate gas price linked to import prices of fuel oil and LPG • Market price allowed for unconventional gas (including shale gas) • VAT rebates granted for LNG imports from 2011 to 2020 • Shale gas price subsidy: • 0.4 yuan per cubic meter from 2012 to 2015 http://www.nortonrose.com/knowledge/publications/66881/the-natural-gas-pricing-system-in-china http://www.nortonrose.com/knowledge/publications/63293/has-china-finally-picked-up-the-pace-on-its-natural-gas-reform http://www.mondaq.com/unitedstates/x/217828/Oil+Gas+Electricity/China+Issues+New+Natural+Gas+Utilization+Policy

  20. Natural Gas Pricing – 2天然气定价－2 • Dec. 2012 – New Natural Gas Utilization Policy in effect • Netback pricing • Seasonal and interruptible prices encouraged • Customer categories: preferred, permitted, restricted, prohibited • Gas-fired power projects now permitted anywhere in China (except base load gas-fired power projects prohibited in thirteen large coal-producing areas, e.g. Shaanxi, Mongolia, Jiangxi, and Anhui provinces) • City gate prices (RMB/CM) • Guangxi 2.57 • Guangdong 2.74 • Other 1.8 to 2.3 http://www.nortonrose.com/knowledge/publications/66881/the-natural-gas-pricing-system-in-china http://www.nortonrose.com/knowledge/publications/63293/has-china-finally-picked-up-the-pace-on-its-natural-gas-reform http://www.mondaq.com/unitedstates/x/217828/Oil+Gas+Electricity/China+Issues+New+Natural+Gas+Utilization+Policy http://www.chinadaily.com.cn/business/2012-11/15/content_15933183.htm

  21. Typical Chinese PSC terms中国典型的PSC条款 May not apply to shale gas • Value Added Tax (VAT) rate of 5% of Gross Revenue • Royalty rate of between 0% to 3% for gas production • Cost Recovery Ceiling of 60% of Gross Revenue for onshore discoveries • Contractors’ share of Profit Petroleum varying from 98% to 40% depending on the level of production • State Participation is typically 51% on a carried basis • Signature Bonus of US$1 million • Income Tax rate of 25% of taxable income The Economics of Petroleum Exploration and Development in China, Master’s Thesis, Wanwan Hou, Jan. 2009

  22. Decision-Making and Risks决策与风险 • Key decision – Explore and develop shale gas in China? • Risks • Uncertain production rates: initial and decline • Fracking • Frac design • Water availability • Costs: capital and operating • Pipeline capacity • Pricing • Economics

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