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Goals for China's shale-gas growth look unrealistic

Executives at Chinese energy firms Sinopec and CNPC recently made bullish statements about Chinese shale-gas growth. While some of the long-term goals might still come to fruition, I don't think that their projected growth is likely to happen before the end of 2020.

Frederic J. Brown/Staff | Getty Images | Getty Images

China has the largest technically recoverable shale-gas resources in the world at 1,115 trillion cubic feet (tcf) – nearly twice the U.S.'s 665 tcf, according to the U.S. Energy Information Administration' s (EIA) World Shale Gas Resources report published in June 2013.

The precursor to this study, published in April 2011, was the driver behind the Chinese government's ambitious goals to have 6.5 billion cubic meters (bcm) of shale gas production by 2015, and at least 10 times that by 2020.

Read MoreChinese energy giants upbeat on shale gas outlook

Even without this enormous target mandated by the Chinese government, it was going to be hard for the Chinese companies to achieve significant shale-gas growth in such a short time period. Some of the reasons for this are self evident. The shale in China is deeper, more fractured and in less hospitable regions (desert and mountains, with little access to large quantities of water).

Also, the scale of recoverable resources as specified by the EIA study has not been particularly reliable in the past. For example, in Poland, the initial hoopla around 44 tcf recoverable shale gas reported in the 2011 EIA shale gas study died down after it was reduced to just 9 tcf in the 2013 study. This is not really a fault with the EIA study itself, but rather a result of a better understanding of shale as a resource over the past few years as the technology has become more mature in identifying the right kind of resources.

Read MoreUS-China shale gas rivalry bad news for poor countries

China's initial aim of 60 to 100 bcm of shale-gas production by 2020 were slashed by more than half in early August 2014 to a more manageable 30 bcm. Even the more modest 6.5 bcm production target by 2015 is looking hard to achieve. In 2013, China achieved shale-gas production of 0.2 bcm, up almost fivefold from the year before. This trend of exponential increase is continuing in 2014 as well but almost all of that production is coming from only one field. This field, Fuling, is run by Sinopec and has been an exception and not the rule. The other promising acreage, all given to the largest Chinese state oil companies (CNPC and Sinopec) have not been producing at comparable rates. So much so that Shell, a partner with CNPC in the promising Fushun-Yongchuan Block, has started reducing its capital expenditure and has reduced drilling activity in the area after not being able to find the volumes of shale gas required to make the venture economic, according to our internal analysis.

The economics of shale-gas production in China are also hindered by other factors. The cost of drilling a well there is between $8 million to 10 million, double the cost of drilling in the U.S, according to Energy and Technology magazine. The present Chinese government subsidies to reduce some of these high drilling costs have not been enough to prompt more producers to start drilling. The Chinese gas-pipeline infrastructure remains a monopoly with most of the infrastructure in the hands of one company, CNPC. This reduces the incentive for other companies to produce shale gas, since they will have only one customer to sell it to.

Chinese gas markets have only started the process of deregulation over the last year and still remain tightly controlled by the government. The lack of high gas prices puts a further damper on producers' drilling efforts, given that their high production costs will not be recovered over the medium term.

Read MoreHow the US shale-gas boom could derail China

Statements made recently by Chinese energy executives about 2020 production goals look less realistic and more like a public-relations exercise aimed at appeasing the Chinese government.

Kartik Misra is a Senior Analyst covering natural gas and LNG at Energy Intelligence, an independent analysis firm that serves the energy industry. Follow the company on Twitter @energyintel.

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