Shale backlash hits China after deadly quakes in drilling hub

By Aibing Guo and Dan Murtaugh on 2/26/2019

HONG KONG and SINGAPORE (Bloomberg) -- The backlash against shale drilling in earthquake-prone regions -- a thorn in the side of U.S. energy companies for the past decade -- reached China this week after a series of temblors killed two people and reduced homes to rubble.

China’s biggest oil and gas producer halted drilling in an area of the country’s shale hub after three quakes on Sunday and Monday toppled nine houses and caused cracks in dams holding back five small reservoirs, according to the government website of Zigong city in the southwestern province of Sichuan. A further twelve people were injured and nearly 11,000 homes damaged, with losses pegged at about $2 million dollars.

The incident spurred residents to gather at a government building to ask if increased shale drilling in the area was to blame, state-run CCTV reported. The local government’s Weibo account said protesters numbered about 1,000, including some calling for a ban on shale exploration. A unit of China National Petroleum Corp. was forced to suspend operations, although Zigong city said on its website that more research is necessary to determine whether the quakes were caused by shale activity.

The response echoes concerns in parts of the U.S., whose shale success Chinese drillers are trying to emulate as they attempt to boost domestic oil and gas production after becoming the world’s biggest importer of both fuels. It also underscores how China’s citizenry is becoming more vocal in contesting any adverse environmental effects of industry.

“If local populations became wary of this it could mean greater local resistance to drilling programs in Sichuan,” said Neil Beveridge, an analyst with Sanford C. Bernstein & Co. in Hong Kong. “That’s the greatest risk.”

Sichuan lies at the crossroads of some of the world’s most active fault lines, and a 2008 quake there killed more than 80,000. The province is also the center of China’s emerging shale industry.

CNPC deployed 125 rigs to the province last summer to accelerate its development and the company has a multi-billion dollar spending plan to raise capacity to produce 42 Bcmg from the region by 2035, to help meet government targets for higher energy output amid skyrocketing imports. That would amount to about 15% of the nation’s current gas consumption.

Fracing concerns

The firm has 15 platforms and 39 wells in the affected area of Rong county, according to the Zigong city website. CNPC’s Beijing-based spokesman wasn’t available for comment. The company’s listed unit, PetroChina Co., fell as much as 1.9 percent in Hong Kong before ending 0.6% lower.

In U.S. states like Oklahoma and Texas, complaints of an increase in tremors have accompanied the dramatic rise of shale drilling, especially the underground disposal of water used in the fracking process. Regulators in Texas said in December they were considering new water-disposal restrictions because of quakes.

A possible link between shale drilling and increased seismic activity in Sichuan province has been an ongoing cause for concern, said Min Na, a BloombergNEF analyst in Beijing. The most recent incident is kindling a more open discussion and could spur a further response from the authorities, she said.

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