PetroChina's Gulong shale project may bolster China's oil output
PetroChina 601857.SS will be spending billions of dollars to
accelerate drilling of rare shale formations in northeast China that could be
pivotal to sustaining oil output in the world's largest consumer.
The state-run oil and gas producer aims to kick off
production at its unconventional oil project in 2025 and double its capacity by
the end of this decade, company officials and analysts say. If the pilot is
successful, the technologies could be replicated elsewhere to unlock China's
vast untapped shale reserves.
Gulong, situated at the sprawling Songliao basin, lies
within the area of PetroChina's flagship Daqing field, China's biggest oilfield
which has been pumping for over six decades but where output is diminishing.
The oil major's plans would sustain Daqing's role as the top
producing field as well as help arrest China's declining oil production.
"With the breakthrough in Gulong along with the
successful testing of the pilot well, China could hopefully develop its vast
proven yet undeveloped resource," said Palzor Shenga, vice president of
upstream research at Rystad Energy.
China produces only 35,000 barrels per day (bpd) of shale
oil mostly in the northern Ordos basin and northwestern Jungar basin, less than
1% of total output. But Gulong is touted as a more prospective project, with
lower cost and higher and better quality output.
"Gulong shale is a thick mud-level lacustrine shale
which contains high quality light oil," Shenga said, adding the firm was
aiming for break-even cost below $55 a barrel.
The success of Gulong could hold the key to sustaining
China's oil production at 4 million bpd, nearly 30% of its consumption, the
minimum supply to power manufacturing activities and military services,
analysts said.
Having outlined lower-carbon goals to fight climate change,
Chinese state majors also need to balance long-term targets against Beijing's
pre-occupation with energy security.
"Despite carbon goals, the industry sets its sights on
boosting oil and gas production and reserves till at least 2025 ... (this) fits
into the broad geopolitical context of China-U.S. relations, the COVID-19
pandemic and the country's high reliance on oil imports," a senior
state-oil official in Beijing told Reuters.
Domestic output has plateaued since hitting a peak at 4.3
million bpd in 2015. Thus, PetroChina and Sinopec 0386.HK have accelerated
drilling terrain as much as 8,000 meters deep in the Gobi desert to make up for
their depleting mature fields.
After over a decade of work, PetroChina said last month it
aims to produce 20,000 bpd of shale oil in 2025 from Gulong, where it has
proven geological reserves of more than 9 billion barrels.
He Wenyuan, Daqing's chief geologist, told reporters
PetroChina had improved its fracking technology by completing a horizontal well
in less than 20 days versus 113 days previously. It also aims for net zero
emission by injecting carbon dioxide into wells - to capture and reuse it.
He said PetroChina still faces tremendous challenges such as
how to locate high-yielding oil flows faster and to extend its life span once a
well reaches peak output.
"We're venturing into a 'no man's' zone in
Gulong," He said.
"Our focus will be to enhance the oil recovery rate ...
only with high-efficiency fracking will we be able to achieve cost-effective
development," He said, referring to the drilling techniques that involve
injecting sand, water and chemicals to force open channels for oil to flow.
Shell RDSa.L and BP BP.L were invited to study Gulong shale
in 2019 and 2020, but the companies concluded there was no similar geology
elsewhere that has been commercially viable, the geologist said.
BP declined to comment. Shell did not respond to a request
for comment.
CHALLENGING TERRAIN
Geologically, Gulong's lacustrine shale is unique with no
commercial precedent anywhere in the world, and its low permeability means it
is tougher and more costly to extract versus marine-sediment shales in North
America, experts say.
Lacustrine shale is formed from freshwater lakes where
hydrocarbon deposits are more fragmented while marine sediments are from larger
seas.
Rystad's Shenga estimated PetroChina would need to spend
$3.5 billion to reach output of 40,000 bpd.
"Unconventional oil plays have been downplayed in China
due to the perception that lacustrine shales are difficult to frack," said
Yu Baihui, analyst at IHS Markit.
Zhang Xianhui, researcher at consultancy Wood Mackenzie,
said the Gulong find shows China still holds significant untapped oil
resources, but in more challenging reservoirs.
"Despite the proven reserve figure, the level of
commercial recovery is highly uncertain. A lot of work needs to be done to
understand the geology and the right technology to be applied to optimise recovery,"
Zhang said.
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