China extracts commercially viable natural gas from deeper shale formations

Short analysis

September 30, 2024

Data source: Advanced Resources International, Inc.

China is a major importer of natural gas through pipelines and the world’s largest importer of liquefied natural gas (LNG). Over the past decade, the Chinese government has actively supported the development of unconventional natural gas resources to reduce import dependence and enhance energy security.

According to a report by S&P Global Commodity Insights (SPGCI), the China National Petroleum Corporation (CNPC) produced natural gas from shale in the Lower Cambrian formation in the Sichuan Basin at a depth of more than 4,500 meters in 2023. Viable natural gas was produced from this deeper formation. SPGCI reported that the Zi 201 well initially produced 26.1 million cubic feet per day (MMcf/d), a commercial rate that could mean the Cambrian formation is entering a new phase of large-scale shale gas development.

Currently, only two of China’s national oil companies – CNPC and the China Petroleum and Chemical Corporation (Sinopec) – produce shale gas, mainly from existing fields in the Silurian Longmaxi Formation of the Sichuan Basin. At an average depth of 3500 meters, the Silurian Longmaxi shale formation is shallower than the Lower Cambrian.

China’s domestic shale gas production averaged 2.51 billion cubic feet per day (Bcf/d) in 2023, up from 0.02 Bcf/d in 2013, according to data compiled by SPGCI. Since 2013, Chinese companies have gained a better geological understanding of shale formations and deployed more advanced hydraulic and automation techniques, steadily increasing shale gas production. However, we estimate that shale gas would account for only 12% of China’s domestic natural gas production of 21.7 Bcf/d in 2023, as geological and cost issues have hindered faster development. In 2023, China’s natural gas imports averaged 16.0 Bcf/d and accounted for 42% of China’s total natural gas supply, up from 15% of its supply in 2010.

Data source: S&P Global Inc., S&P Global Commodity Insights, 2024; Sinopec, Annual report 2023
Remark: Sinopec=the China Petroleum and Chemical Corporation; CNPC=the China National Petroleum Corporation

In 2018, China’s Ministry of Finance and the State Administration of Taxation introduced a preferential tax policy to reduce the resource tax on shale gas production from 6.0% to 4.2%. Last year, this policy was extended until December 2027.

Following the release of China’s 14th Five-Year Plan in 2021, policy guidelines continued to support the development of unconventional natural gas resources. Production from unconventional formations, such as tight gas, shale gas and coal seam methane, averaged 8.6 Bcf/d in 2023.

Currently, China is one of four countries in the world producing commercial quantities of shale gas. The others are the United States, Canada and Argentina. Us Assessments of global shale resources The 2015 report estimates that 1.115 trillion cubic meters of technically recoverable shale gas resources are available from China’s seven most promising natural gas basins. More than half of these resources are in the Sichuan Basin (626 trillion cubic feet). The southwestern region of the Sichuan Basin dominates China’s shale leasing and drilling activities because it offers China’s best combination of favorable geology, flat surface conditions for accessibility, existing pipelines, abundant water resources, and access to major urban natural gas markets. Other parts of the Sichuan Basin are structurally or topographically complex or have elevated hydrogen sulfide (H₂S) contamination that makes commercial development of shale gas more challenging.

Main contributors: Faouzi Aloulou, Victoria Zaretskaya