In 2018, China’s domestic gas production reached 161 bcm compared to 280 bcm of total demand. Over the past five years, annual output has increased by an average 9 bcm (7%) just as demand has grown by an average 23 bcm each year – an incremental 14 bcm added to the supply deficit each year. The contrasting growth rates between gas demand growth and supply have fostered a rapid increase in the country’s appetite for LNG and piped gas imports.
The 13th five-year plan includes a production target of 200 bcm by 2020 but to reach this, output would need to increase by an average of 20 bcm (around 12%) y/y over 2019 and 2020, compared to the 11 bcm (8%) growth rate in the last two years. Such an increase in the pace of growth seems unlikely, despite increased capital spending from the majors over the past two years. For 2019, the majors are planning to spend some $8 billion more on their upstream spending than in 2017.
The Chinese majors’ investment in gas exploration has seen proven conventional gas reserve estimates increase from 110 tcf (3 tcm) in 2012 to 247 tcf (7 tcm) in 2018. A recent survey of shale basins by China’s Ministry of Natural Resources (MNR) put potentially recoverable shale reserves at 5,400 tcf (152 tcm). Given the gulf in the reserve base, the development of shale gas production in China is paramount for meeting domestic production goals.
Sinopec and CNPC have been shale trailblazers. The jewel in the crown is the Fuling shale basin in Southwest China's Chongqing, although both companies have been active in announcing new significant shale finds. Despite higher efficiency in shale wells, the breakeven cost of producing shale gas in China is still high, ranging from 1.2 RMB/m3 (5.0 $/mmbtu) to 2.8 RMB/m3 (11.7 $/mmbtu).
Shale gas production promotion by the government includes a favourable tax rate and an outright subsidy of 0.3 RMB/m3 (1.25 $/mmbtu), which is set to be cut to 0.2 RMB/m3 (0.84 $/mmbtu). Foreign companies have been active for a while, particularly through production-sharing arrangements with the majors on unconventionals, and many are expanding their operations in China. To boost these efforts, China has started to reform its gas sector by promising to open up upstream business and by forming an independent gas grid company.
Over the coming two years, we expect Chinese domestic production to increase by an average of 11.5 bcm y/y every year. This will take 2020 output to 184 bcm, 16 bcm short of the 200 bcm 2020 target, with misses in shale gas production (due to size of target), coal-bed methane (CBM) and coal-to-gas.