- China will nearly double its natural gas production from shale basins over the next two years, energy research firm Wood Mackenzie forecasts.
- The country's national oil companies have developed homegrown technology and techniques to coax natural gas from China's challenging shale rock formations.
- Despite the growth, Wood Mackenzie's forecasts still fall short of Beijing's target, and China remains a minnow compared to the whale that is U.S. shale gas.
Chinese energy giants are making progress unlocking natural gas from shale rock formations, taking a step towards replicating the U.S. shale revolution, according to a new report.
But China's national oil companies still have plenty of ground to cover before they even approximate the level of success America's shale pioneers have achieved, reports energy research firm Wood Mackenzie.
Over the last decade, China's natural gas production has risen to 9 billion cubic meters. Wood Mackenzie forecasts that output will nearly double to 17 billion cubic meters by 2020 as Chinese energy giants fine tune advanced drilling methods tailored for their country.
While that's notable, it still makes China a minnow compared to the whale that is U.S. shale gas. Last year, American drillers produced 474.6 billion cubic meters of natural gas from shale rock.
Wood Mackenzie's forecast puts output far short of targets set by Beijing. The country aimed to produce 30 billion cubic meters of natural gas from shale by the turn of the decade to cut its reliance on coal.
"The simplest challenge for China to hit the 30 bcm target is the target's too high," Wood Mackenzie consultant Dr. Tingyun Yang told CNBC's "Squawk Box" in Asia.
Chinese oil companies would have to roughly double their activity to hit that target, and that is "not physically feasible," says Yang.
Still, the drillers are developing homegrown technology and techniques that have cut the time and cost of drilling wells in China's southwestern Sichuan Basin, where a handful of projects are producing gas for Sinopec and PetroChina.
China has slashed the costs of drilling exploration wells by 40 percent from 2010 levels and reduced costs associated with commercial wells by a quarter since 2014, according to Wood Mackenzie.
The firm sees more room for further savings. A recent contract to complete four Sichuan region wells signed by oilfield services firm Honghua Group suggests costs could fall by another 20 percent compared to 2017 levels, according to Wood Mackenzie.
"In terms of technology, the Chinese NOCs actually have built up their learning curves in a relatively short period," Yang said, referring to national oil companies.
"They have explored a unique practice in China, compact well sites and hydraulic fracturing techniques that suit China's geology."
Hydraulic fracturing is the key to unlocking oil and gas from shale formations. It involves pumping a mixture of water, sand and some chemicals into wells to create fractures in rock formations, which allow oil and gas to flow.
China faces challenges both above and below ground due to the nature of its shale resources.
The country's shale basins are mostly located in remote, mountainous regions that lack a network of pipelines and other infrastructure. All of that makes prepping well sites and shipping gas a costly endeavor.
The Chinese shale formations themselves tend to be relatively deep. That means Chinese firms typically have to drill deeper than U.S. frackers, which raises costs and makes it tougher to maintain well integrity during drilling, Wood Mackenzie says.
The nation also lacks several things that drove the U.S. shale boom: open markets that promote competition, a network of small frackers that push innovation and locally available expertise.
As for whether a partnership with U.S. companies could turbocharge development, Yang says that sort of cooperation is certainly possible, but it's no cure-all because China's shale landscape is so different than America's.