NELL LUKOSAVICH, Senior Editor
China boasts the world’s largest shale gas reserves and enormous new offshore resource potential, but geopolitical tensions and environmental concerns threaten to slow China’s E&P development
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From left: The CNOOC-operated Yacheng 13-1 field, one of the largest gas fields in the South China Sea, was purchased by CNOOC from BP in 2004. The field has been producing gas for Hong Kong and Hainan Island since 1996. Drilling site managed by Canada-based Pajak Engineering. Great Wall Drilling Company’s (GWDC) China-made LEAP800 wireline logging system.
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With Chinese companies spending a total of more than $135 billion on oil and gas transactions over the past five years, the world’s most populous country is becoming a prominent player in the global energy market. A series of giant oil and gas discoveries—the largest in China’s history—in the South China Sea in 2011 have revealed massive undeveloped resources, gaining the attention of key global energy developers and foreign investment. Following a steady decline in onshore production, at China’s largest producing fields, Daqing and Shengli, over the last several years, the discovery of large shale and tight gas resources has brought renewed attention to onshore development.
While South China Sea holds potential reserves of 213 billion bbl of oil, decades-old maritime and geopolitical disputes regarding the area have hampered development. Additionally, environmental concerns following June’s oil spill at China’s largest oil field, Penglai 19-3, in Bohai Bay, have launched a series of new regulatory directives. Despite these challenges, China is seeking to double its current daily oil and gas production to 500,000 boepd by 2015 and 1 million boepd by 2020 from fields in the deepwater South China Sea and has no shortage in joint venture partners to tap its unexplored resources.
Similarly, China is seeking technology partners to help develop the country’s massive shale gas reserves. While environmental concerns due to the water shortages and toxic sulfide air pollutants, as well as increased development costs compared to similar foreign resources, have caused regulators and company officials to proceed slowly in developing the resource, new incentives are aiming to attract foreign expertise.
According to the US Energy Information Administration (EIA) January 2011 report, China had 20.4 billion bbl of proven oil reserves and produced an estimated 4.3 million bpd of total liquids in 2010. A vast majority of the liquids produced (96%) were crude oil. While Chinese domestic oil consumption represents 30% of global consumption growth, the demand for both coal and natural gas have also increased.
While an estimated 85% of Chinese oil production has traditionally focused on maturing onshore fields, located in the country’s northwest provinces, output has been steadily and significantly declining over the last five decades. Enhanced oil recovery (EOR) techniques have boosted production in some of China’s brownfields. PetroChina plans to boost production at one of China’s oldest basins, Junggar, from 250,000 bopd in 2008 to 330,000 bopd in 2015. However, with a 3.4% and 2% decline rate per year at China’s largest producing fields, Daqing and Shengli, respectively, the country’s focus in 2011 shifted to offshore development following the announcement of 180 oil and gas discoveries in the South China Sea. While the country has yet to commercially produce shale gas, a series of upcoming permit auctions have been announced.
SOUTH CHINA SEA: NEW DEEPWATER FRONTIER
The South China Sea encompasses 1.4 million sq mi, including more than 200 small islands, rocks and reefs, with the majority located in the Paracel and Spratly Island chains. According to the US Geological Survey (USGS), the basins of the South China Sea hold an estimated 28 billion boe, 266 Tcf of recoverable gas and 7.5 billion bbl of recoverable oil. Presently, the region is producing 1.3 billion bopd and 2.3 Tcf of gas. The Bohai Bay basin, located offshore Beijing, is the region’s main offshore production zone, and has been the focus of E&P activity throughout 2011. Several giant gas discoveries in Bohai Bay—beginning with Husky Energy’s 4-7 Tcf find in 2006—have launched more aggressive exploration drilling activities in the second half of the year.
Offshore E&P activity
While, under law, China National Offshore Oil Corp (CNOOC) holds exclusive rights to both deepwater and shallow-water drilling, Sinopec and China National Petroleum Group (CNPC) are able to conduct exploration and production in shallow waters. Both Chinese national companies, through CNOOC, are able to enter into production-sharing agreements with foreign companies.
The natural gas activity offshore China took off when Canada’s Husky Energy made the country’s largest-ever offshore gas discovery in the area with the Liwan 3-1-1 discovery well, Fig. 1. Drilled to a TVD of 3,887 m, the well logged 36 m of net gas pay and flowed at 53 MMcfd of gas, with a future potential of 150 MMcfd. After drilling a series of appraisal wells, Husky is planning to tie back the subsea wells to a central processing platform in shallower waters of 200 m. Field development was approved by Husky in September 2011 and is currently waiting for approval by the Chinese government.
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Fig. 1. The giant Liwan gas field, located 350 km southeast of Hong Kong, holds the largest gas reserves in the South China Sea discovered to date.
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China’s largest oil producer, CNOOC, had a total output of 290,000 boepd in 2010 and has set a target of 1 million boepd in the South China Sea by 2020. The company also announced plans to increase its exploration budget by 50% in 2011. Currently drilling five deepwater wells, at a cost of about $100 million each, CNOOC has announced several large gas finds in the Liuhua 29-1 and Lingshui 22-1 deepwater blocks.
In May, CNOOC offered up 19 offshore blocks, totaling 20,000 sq mi, for joint exploration with international partners, including 12 in the eastern region of the South China Sea and seven in the western region.
Joint venture developments
Through a series of production sharing agreements, operators, such as Chevron, Shell, BP, ConocoPhillips, Eni, Petrofac, Qatar Petroleum and Anadarko, have become heavily involved in exploration and production activities in the South China Sea.
In October, Chevron announced plans to begin drilling its first gas exploration well in Block 42/05 off China’s southern coast after acquiring the deepwater blocks from Devon Energy in 2010. The US independent also plans to drill two additional wells in blocks further west.
China’s largest offshore natural gas field, Yacheng 13-1, is currently operated by BP (34%), with CNOOC (51%) and Kuwait Foreign Petroleum Exploration Company (15%) and produces 125 Bcf a year of natural gas. In 2009, Sinopec partnered with Norway’s Statoil to explore deepwater wells in the Qiongdongnan basin.
Eni China is joint operator in the CACT Consortium, together with CNOOC and Chevron, in the Chinese South Sea with an equity daily production of 12,000 boed. The consortium has been exploring the region since 2000.
Geopolitical and maritime disputes
As advancing deepwater equipment becomes available to the area, such as Shanghai Waigaoqiao Shipyard’s new HYSY 981 drilling rig (Fig. 2), which can drill in 3,000 m of water to 12,000 m TWD, operators are being able to access the more expansive, deeper areas of the South China Sea. While the expanding resource potential offshore China, and the billions of dollars that lie at stake in developing these resources, has caught the attention of the global energy community, tensions have begun to rise regarding overlapping seabed claims in the South China Sea, delaying seismic activity and field development.
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Fig. 2. The HYSY 981 deepwater rig gives China the physical capacity to drill in the deepest portions of the South China Sea basins.
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While the People’s Republic of China (PRC) currently claims ownership of a vast majority of the body of water, Indonesia, Republic of China (Taiwan), the Philippines, Vietnam, Malaysia, Cambodia, Singapore and Thailand have all voiced their own competing ownership claims over various areas of the region, Fig. 3. Currently, over one-third of the world’s shipping passes through the South China Sea.
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Fig. 3. China’s traditional territorial claims in the South China Sea are by nine-dashed, or u-shaped line, printed on maps published in the People’s Republic of China documents.
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Disputes over the seabed surrounding the Spratly and Paracel Islands and have become the forefront of political debate, with neighboring countries claiming legal country ownership of the waters and hundreds of tiny islands that dot the ocean. Vietnam has been particularly aggressive in voicing their claims to the Spratly and Paracel Islands, with the People’s Republic of China and South Vietnam each having controlled part of the Paracel Islands before 1974. Recognition of a country’s ownership would give that nation a 200-mile ownership extension and sole jurisdiction rights of natural resources.
A vast majority of the ASEAN member countries (including Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) have put joint development agreements in place for areas such as the Gulf of Thailand to the share profits made from resource development.
Following discussions regarding naval and fishing activities in March of this year, Chinese and Vietnamese diplomats reportedly settled on an agreement regarding transportation and activity routes. Seven months later, PetroVietnam and India’s Oil and Natural Gas Corp., ONGC, announced a development deal for a sector of the South China Sea. (See Petropolitics/China column on page 65.)
On a recent visit to the Phillipines, U.S. Secretary of State Hillary Clinton announced that any disputes regarding the South China Sea be settled using the international Law of the Seas treaty, which supports the Philippines’ claims regarding the Spratly Islands. Talks are currently underway between the China and other area stakeholders regarding shipping, development agreements, naval partitions and communication and disclosure agreements.
The United Nations Convention on the Law of the Sea has not yet resolved ownership disputes in the South China Sea.
Bohai Bay oil spill
In June of 2011, an oil spill was reported from a subsea rupture at the Penglai 19-3 field, operated by ConocoPhillips (51% owned by CNOOC). Following a second seafloor leak, a total of more than 2,400 sq mi of water was polluted in Bohai Bay, Fig. 6. While Chinese maritime officials claimed that ConocoPhillips had failed to meet its deadline of August 31 to permanently clean up the spill, the company claims that the debris, including oil-based drilling mud, was leftover from earlier spills. ConocoPhillips has established two compensation and environmental funds in the wake of the spill.
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Fig. 6. The Peng Lai 19-3 field oil spill released 700 bbl of oil and 2,500 bbl of oil-based drilling mud into Bohai Bay.
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In November, following a review of the incident, China’s State Oceanic Administration announced that its investigation found negligent errors and failed preventative measures in place in ConocoPhillips China’s systems and management. As of mid-November, the Chinese government had ordered ConocoPhillips to halt all production pending cleanup and an investigation.
The Chinese Ministry of Land and Resources subsequently announced plans to revise offshore drilling regulations, first established in 1982, regarding joint ventures with foreign entities. Currently, CNOOC has the rights to exclusively undertake offshore development projects with foreign companies, though the details regarding obligations under the regulations are very general.
Offshore regulation
Since 1985, China’s Offshore Oil Operations Safety Office has studied and recorded international offshore incidents, including last year’s Macondo blowout. Regulatory officials are working with international agencies, as well as CNOOC, to study foreign deepwater regulations to develop a set of domestic policies.
SHALE GAS DEVELOPMENT
Onshore activity, dominated by CNOOC and CNPC, has focused on natural gas resources in the country’s western interior provinces such as Xinjiang, Sichuan, Gansu and Inner Mongolia. The country’s shale gas resources are located in six onshore shale basins, although only two of those—in the Sichuan and Tarim basins—have been proven so far to be commercially viable, Fig. 4.
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Fig. 4. PetroChina plans to build at least 200 wells in this corner of the Sichuan basin by 2015, which is located directly southwest of the Boyang natural gas basin.
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Shale gas reserves are estimated by EIA at 1,275 Tcf and currently the largest in the world, Fig. 5. Following the signing of the U.S.-China Shale Gas Resource Initiative by U.S. President Barack Obama and Chinese General Secretary Hu Jintao in 2009, significant progress has been made on developing these vast shale formations, beginning with the Sichuan basin. In order to better understand the specialized techniques involved in extracting shale gas, CNOOC, PetroChina and Sinopec have partnered with international entities, such as Schlumberger, Baker Hughes, BP, Shell and Chevron.
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Fig. 5. China leads the world in technically recoverable estimated shale gas. Source: U.S. Energy Information Administration.
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In August, Sinopec announced plans to increase upstream investment in unconventional resources, noting a plan to accelerate shale gas and tight gas development. The company currently has 20 unconventional gas wells at the experimental stage.
Lease sales
While the first horizontal exploration well was successfully drilled (by partners PetroChina and Shell) earlier this year, commercial production has yet to commence. In the first round of bidding for development permits in the spring of 2011, only six Chinese oil companies (PetroChina, Sinopec, CNOOC, Shaanxi Yanchang petroleum, CUCBM and Henan Provincial Coal Seam Gas) were allowed to participate. SinoPec and Henan Coal Seam Development received the first development permits, though only two of the four blocks up for auction received sufficient bids to even be auctioned off. Two more rounds of bidding are scheduled for the end of 2011 and private companies will be invited to participate.
Seeking foreign expertise
In order to apply the latest shale extraction technologies, China has looked to foreign companies with a heavy knowledge base in the subject area. Aside from partnering with shale technology firms abroad (particularly in the US), China has also invested significant capital in partnering to develop shale gas projects abroad. In early 2011, CNOOC announced that it had entered into an agreement with Chesapeake Corp. to purchase a 33.3% stake in the US independent’s northeast Colorado and southeast Wyoming acreage for a total cost of $1.3 billion. In addition to becoming a leaseholder, CNOOC will also fund a share of Chesapeake’s drilling and completion costs under the agreement. The agreement follows a deal made in October 2010 in which CNOOC purchased a 33.3% interest in Chesapeake’s 600,000-acre Eagle Ford leasehold for $1.1 billion.
PetroChina has also made a sizeable investment in US shale development. In February, the company signed an agreement with Canada’s EnCana to acquire a 50% interest in EnCana’s Cutbank Ridge business assets, including 1.3 million acres of land and 700 MMcfd processing capacity, in British Columbia and Alberta, Canada for $ 5.43 billion.
Investment incentives
In response to inquiries from US-based operators and service companies regarding restrictions on foreign participation in China’s shale gas development, the Chinese government announced in August a plan to create separate investment incentives for shale gas from traditional hydrocarbon development. The pricing and permitting incentives aim to entice foreign entities, specifically small companies and independents, to invest in developing the vast resources. The government also hopes to attract the attention of foreign partners for technical collaboration.
Currently, Shell is the only western company to partner with PetroChina in exploration and field development, although BP and Statoil are also exploring similar partnerships.
Technical challenges.
Because China’s shale resources are deeper and contain higher levels of nonhydrocarbon gases than those of typical US shale formations, development costs are expected to rise, particularly so in areas that have harsh terrain and limited accessibility. Challenges to supply the enormous quantities of water needed during hydraulic fracturing operations—in a region that already suffers water shortages—may very well add to these development costs.
Additionally, the high amounts of hydrogen sulfide found in China’s shale gas formations increase corrosion in equipment used at the drilling site, which will require additional cost in materials.
TECHNOLOGY TRENDS
CNPC has been working on a series of research and technology advances to support new exploration programs and reverse declining production in its major onshore fields. In order to better evaluate basement reservoirs in mature basins, the company developed six key prediction and evaluation technologies which have identified three major potential areas for the exploration of basement reservoirs in China.
GeoEast-Lightning, developed by CNPC in 2010, is a reverse time migration software system which improves depth migration imaging in both onshore and offshore applications, Fig. 7. The company has also developed an integrated and networked software platform for well logging interpretation system, which is the world’s first third-generation logging processing and interpretation system based on the Java-NetBeans platform.
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Fig. 7. CNPC’s GeoEast-Lightning was first tested by processing data from 2,255 sq km in Xinjiang Uygur Autonomous region, Bohai Bay Rim, and the pre-Caspian basin.
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In order to enhance the thermal recovery of ultra-heavy oil, CNPC has been testing technologies and methods that are embodied in a large-scale 3D simulation device, which enable physical simulation of a variety of recovery technologies for heavy and ultra-heavy oil. Pilot test bases have been built for new development technologies of heavy oil, one in Liaohe Oilfield and the other in Xinjiang region.
Sinopec has been testing a series of new technologies for stable production in major oilfields, including waterflooding EOR, tertiary oil recovery, viscous oil recovery, low permeability oil and gas field development and beach oilfield development. The company is currently developing new advancements in reservoir geophysics, high-precision 3D seismic, automatic vertical drilling and reservoir reconstruction.
Daqing Oil Field Company this year concluded its testing of the effects of reaction conditions on copolymerization and the use of the polymer as the water clarifier in oilfield water treatment. Daqing, in conjunction with the China University of Petroleum, has also been testing the use of polymer solution and viscosity stabilizer in managing oil displacement.
Baker Hughes and the China University of Petroleum have developed a new acoustic interpretation method for gas indication in the shaly sandstone formation. Successfully tested in several shaly sand wells, the method determines the variation of the dry frame bulk-to-shear moduli ratio by calibrating it in a water-bearing zone and enables direct interpretation of gas-bearing sands. 
Shell and CNPC work togeather to automate the drilling process
MARK W. ANDERSON, Shell P&T Wells
As conventional oil and gas reserves become increasingly hard to find, the energy industry has shifted its focus to resources such as coalbed methane (CBM), shale and heavy oil. While these reservoirs contain vast hydrocarbon deposits, full development of each field requires the drilling of hundreds, if not thousands, of wells. Not surprisingly, drilling costs represent the biggest expense in exploitation of these reservoirs.
In June, Shell and China National Petroleum Corp. (CNPC) announced their intent to form a joint venture that would dramatically reduce the costs of developing unconventional fields that require large numbers of wells. Its goal is to devise and deploy a well manufacturing system—an “assembly line” of sorts—by standardizing and automating drilling processes.
Automating drilling processes. With plans to drill about 30,000 shale gas, tight gas and CBM wells worldwide by the end of the decade, Shell had strong incentives to minimize its drilling costs. In anticipation of that need, several years ago company engineers began looking at ways to improve on manual drilling practices. One of their first successes was an algorithm for automatically reducing drill bit vibrations and controlling torque on the drillstring. The development of Shell’s Soft-Torque Rotary System was based on this algorithm combined with a rig’s normal top-drive software. The system resulted in faster drilling and fewer trips to replace the bit.
Continuing research led to the development of Shell’s proprietary SCADAdrill system, which interfaces with a rig’s existing controls to provide autonomous drilling, survey and directional drilling and to check conditions downhole. It continuously monitors downhole conditions and responds to changes by adjusting drilling factors such as weight on bit, rotary speed and flowrate to ensure optimum penetration rate.
Shell first tested the autonomous operations system in its Peace River oil sands project in Canada. In 2010, Shell installed the system on its Synergy drilling rig in the Netherlands, where it is in the proof-of-concept phase (see figure). As the system has become more stable and robust, less intervention from a human driller has been required.
Replacing people with machines. The autonomous operations system became the “brain” of an innovative well manufacturing process that represents a dramatic departure from traditional drilling practices, which involve using a massive, multi-functional rig, operated by a trained crew, to drill each well from beginning to end. Like factory assembly lines, the new process will drill and complete wells through a series of standardized, repeatable steps. For example, in CBM applications, highly automated, truck-mounted rigs each will perform a single step or series of steps in the drilling sequence. One machine might drill the top hole, a second the intermediate section of the well, and a third would do the completion work.
After each rig finishes its work, it will move to the next wellsite. Then the rig designed to complete the next step in the drilling sequence will move into place. As a result, multiple wells will be in various stages of drilling and completion throughout the field at any given time.
A good marriage. When Shell began looking for a partner to help fine-tune and deploy its well manufacturing system, CNPC was an obvious choice. While Shell is vertically integrated, CNPC is even more so, as it has its own drilling services and equipment manufacturing companies. The joint venture seeks to combine Shell’s technological experience in developing unconventional fields with CNPC’s extensive expertise in rig and equipment design and as a service company. The venture will be led by an eight-member leadership team from both companies with a CNPC representative as its CEO. Its primary focus will be on designing, building and operating the well manufacturing systems for joint CNPC-Shell projects.
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A rig equipped with Shell’s proprietary autonomous operations system.
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The companies already are partners on a number of oil and gas projects, both in China and around the globe. Shell and PetroChina, which is owned by CNPC, operate Changbei, a tight gas field in the Ordos basin in Shaanxi province, which began commercial production in March 2007. They also are exploring together in the Sichuan basin’s Jinqiu shale gas and Fushun-Yongchuan blocks.
China, the world’s largest energy-consuming nation, is seeking to exploit its immense shale reserves. According to US Department of Energy estimates, these fields hold 12 times more fuel than China’s conventional gas fields and significantly more than US shale deposits, which total about 860 Tcf. China also is believed to have the world’s third largest CBM resources after Russia and the US. The country has stated that it wants to reduce reliance on coal by tripling gas use to about 10% of energy consumption by 2020.
A new business model. The well manufacturing system is intended for fields that require the rapid drilling of many wells and are uniform enough for the standardization concept to work. Coalbed methane and some heavy oil and shale plays fit that description. On the other hand, it would not make sense to invest in this system to drill a field with 20 wells; such cases would continue to require the traditional model, with service providers and drilling contractors doing the work.
Equipment for the well manufacturing system is currently in the design stage, with manufacturing scheduled to start in late 2011 or early 2012. System deployment will begin in 2013.
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