Shell May Be Less Than 2 Years Away from Major China Shale Advancements

Royal Dutch Shell says it may be less than two years away from a major advance in shale gas production in China, bringing the Asian country closer to being the first outside of North America to cash in on technology that's transformed the U.S. energy industry.

Unlocking the gas trapped inside China's shale rock reserves, the world's biggest, would provide much needed energy supplies to the energy-hungry economy and help cut down on expensive imports of gas. It would also provide a windfall for western energy giants who provide the complex hydraulic fracturing technology.

Shell is on track to have spent $2 billion by the end of this year exploring the central province of Sichuan, and has drilled nearly 30 wells in joint-venture projects with China National Petroleum Corp.

"Mid-decade we will be able to decide" on the so-called final investment decision that will determine whether to go into full commercial production, said Maarten Wetselaar, who heads Shell's integrated gas operations worldwide excluding North America, and was speaking in an interview.

The multinational energy company is already producing tiny amounts of shale gas as part of its exploration work that it pumps into Sichuan's natural gas network. How quickly output can be ramped up after further investment isn't clear.

Beijing has set an ambitious target of producing 6.5 billion cubic meters of shale gas annually by 2015, and as much as 100 billion cubic meters by 2020, from nearly zero now. Getting the Shell project into operation will be critical in meeting those goals.

In the U.S., which pioneered the technology to extract gas and oil trapped in shale rock formations, gas production has soared, bringing down prices of fuel for manufacturing and chemical production. It has also raised the prospect of liquefied natural gas exports from North America of as much as 70 million tons a year within a decade, equivalent to deliveries from current world leader Qatar, Mr. Wetselaar said.

The U.S. Energy Information Administration has a preliminary estimate of some 36 trillion cubic meters of recoverable shale-gas resources in China, more than the U.S. and Canada combined, which if extracted could transform China's energy profile.

Those estimates have also sent rival Chevron Corp. into China searching for shale, while ConocoPhillips and Total SA are also planning exploration projects. Foreign companies are obliged to have local partners when exploring for shale in China.

China's government has not yet given a formal go-ahead to Shell's draft production-sharing pact with partner CNPC, but Mr. Wetselaar said he isn't worried.

"We will get the correct regime in place," he said. "I don't think it is lack of intent."

Other obstacles in China to successful exploitation include scarce supplies of water required to get the gas out of shale rock, and more complicated geology than in Canada and the U.S.

Still, "outside of North America, China is the most mature in terms of wells, in terms of activity on the ground," said Mr. Wetselaar.

But after China, next ready to produce commercial quantities for shale gas is likely to be Ukraine, where Shell is in the early stages of a drilling program, said Mr. Wetselaar.

Copyright (c) 2012 Dow Jones & Company, Inc.

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