China cracks down on slow going shale producers

Beijing: Chinese authorities have for the first time fined shale gas developers including state-owned oil company Sinopec for failing to meet their investment commitments.

Officials in Beijing, eager to replicate the North American shale boom, imposed the fines as they continue to struggle with oil company reluctance.

Chinese shale gas development has moved more slowly than officials had hoped, due to difficult geography and a legal system that reserves most oil, gas and pipeline infrastructure to a handful of state-owned companies.

Sinopec and PetroChina, China’s two dominant oil groups, have pledged to meet the government’s shale goals with flagship projects in southwest China. Sinopec trumpets its project in Fuling, near the inland port city of Chongqing, as China’s most promising shale development, while Royal Dutch Shell has shown signs of cooling on its joint venture with PetroChina in Sichuan province.

Other developments have flagged. An initiative two years ago to open tracts to other companies has failed to bear fruit, as many of them were unable to meet spending commitments due in part to concerns that they could not profitably sell any gas they found.

The Ministry of Land and Resources announced this week that it would fine Sinopec for failing to spend about one-quarter of its Rmb591 million ($97 million) contracted investment on the Nanchuan shale block. It will also fine Henan Coal Seam Gas Development and Utilisation for spending only half its commitment on the Xiushan prospect. Both blocks straddle the lawless border region where Chongqing, Guizhou and Hunan provinces meet.

Sinopec said on Tuesday it had relinquished a portion of the block after conducting seismic surveys and drilling the deepest horizontal well in China. The ministry fined it Rmb7.97 million. Henan CBM was fined Rmb6.03 million.

The project state-owned PetroChina is developing with Royal Dutch Shell has also been slower than anticipated. Shell chief financial officer Simon Henry said in September that the company might trim its venture due to geological challenges and difficulty accessing water in an area dense with farming villages.

PetroChina denied Chinese media reports that its shale ventures with Shell in Sichuan had been shelved altogether. Shell’s China spokesman, Shi Jiangtao, said the company was “busy evaluating” the results of test wells and would decide its next step in the first quarter of next year.

“We see that the Sichuan geology is challenging and we are approaching this at the appropriate pace. The ongoing evaluation shows mixed results,” he said.

— Financial Times