Shale gas has sparked intense discussions globally, with both the United States and China leading the charge. In China, the second round of shale gas tenders this year has reignited significant interest. As Chen Weidong, head of energy research at CNPC's Energy Economics Research Institute, pointed out, "This marks the first time in the history of China's modern oil industry that upstream investments in oil and gas resources are not restricted by corporate ownership." He further noted, "Non-oil companies and private capital see shale gas exploration as a gateway into the upstream oil and gas sector."
Despite the excitement, the cautious approach of major oil and gas firms like PetroChina, Sinopec, CNOOC, and Yanchang Petroleum is noteworthy. Zhang Dawei, from the Mineral Resources Reserve Evaluation Center, mentioned that non-oil entities, including power companies, private capital, and even real estate firms, are actively participating. He questioned why traditional oil and gas companies seem less eager. The big four oil companies are taking a measured stance since they have existing options. But do other companies entering the upstream sector see substantial profit potential in shale gas? This economic equation requires careful consideration.
Longhua, a chief analyst at Haitong Securities, highlighted the complexity of shale gas mining in China. Current estimates suggest that the average cost per cubic meter of shale gas in the U.S. is around $0.67, while in China, the cost could range from 1.24 to 2.68 yuan/m³ without subsidies. Longhua’s analysis assumes a production cost of 0.18 yuan/m³, a subsidy of 0.4 yuan/m³, and a well’s first two-year output accounting for 70% of its lifecycle. With the current wellhead gas price at 1-1.5 yuan/m³, profitability remains a challenge. A doubling of gas prices could significantly reduce costs and make more reserves economically viable.
According to Longhua, if China’s shale gas achieves mass production, with a single well development cost of 40-60 million yuan and an average daily output of 23,000-48,000 cubic meters over two years, many wells might not be profitable. However, if the wellhead price rises to 2-3 yuan/m³, the guaranteed daily output could drop to 12,000-26,000 cubic meters, enhancing profitability for exploration companies.
Longhua suggests that using trust financing, equity financing, and venture capital could help manage the high initial investment and risks associated with shale gas projects. While his model is based on ideal conditions, the reality is far more complex. Chen Weidong expressed concern, stating, "Many still harbor the 'Great Leap Forward' mentality, expecting overnight success. However, it’s not replicable without the right technology and institutions, something even Europe has struggled to achieve."
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