Tight gas: China's unsung unconventional energy revolution

By Chen Aizhu

SULIGE, China (Reuters) - At the heart of the vast desert region of Inner Mongolia, half a dozen young engineers from PetroChina <0857.HK> watch huge, flat screens in a brightly lit central control office that oversees 5,000 wells at China's largest gas field.

Just a few years ago, two workers travelling in a truck would need three days to check conditions at 50 wells at the Sulige field, which spans 20,000 sq km (7,700 sq miles) in the middle of Maowusu, China's third-largest desert: now, the task can be done in just five minutes.

Remote Sulige, which means "uncooked meat" in Mongolian, is testament to China's success in developing its giant reserves of so-called "tight gas", part of a drive to dramatically boost consumption of cleaner burning natural gas to help replace dirty coal and costly oil imports.

Like the better-known shale gas revolution in the United States, tight gas is transforming China's gas production - accounting for a third of total output in 2012 -- and will form the backbone of the country's push to expand so-called "unconventional" gas production nearly seven-fold by 2030.

The speed and size of the boom has outstripped forecasts and has been led by local firms developing low-cost technology and techniques, already being rolled out by Chinese companies in similar gas fields outside of China.

Like shale gas, although less difficult to extract, tight gas is an unconventional deposit that needs special technology such as horizontal drilling or fracturing to free gas trapped in tiny cavities in rocks like sandstone.

Output of tight gas hit 30 billion cubic metres (bcm) in 2012 -- nearly a third of China's total gas output -- and is expected to rise to 100 bcm by 2030, leading an unconventional fuel boom ahead of shale or coal-seam gas.

"We found our own approach to develop tight gas," said Hu Wenrui, a former Petrochina vice president and a key architect behind developing the deposits. "With this, China's tight gas has entered the fast track."

Forecasts by the China Academy of Engineering (ACE) put 2020 output of tight gas at 80 bcm, more than a forecast 50 bcm of coalbed methane and 20 bcm of shale gas combined.

Despite the excitement over shale gas, of which China holds larger reserves than the United States, the world's top energy user has taken only baby steps to exploit the more complex deposits, drilling just 80 or so wells by the end of last year.

Its output of coal-seam gas continues to disappoint after two decades of development, reaching about 6.5 bcm in 2012.

Chart of China's unconventional gas forecast: http://link.reuters.com/tuc49t

Output growth of Sulige, China's top gas field:http://link.reuters.com/gad49t

LOW COST LIFELINE

Tight gas production at Sulige alone is set to top 20 bcm this year, making up nearly a fifth of China's total gas output, but PetroChina initially struggled to develop the field after declaring it the country's largest in 2001.

Global energy companies like Royal Dutch Shell , Total and BP were brought in to do detailed studies and service companies including Schlumberger and BJ Services, now part of Baker Hughes , were invited to provide drilling and logging expertise.

"The success that PetroChina has had on tight gas is impressive," said Craig McMahon, head of Asia upstream research of energy consultancy Wood Mackenzie.

"Back in 2005 when they offered some of the contracts to Shell and Total it perhaps meant they did not have the expertise yet. Eight years on, you can say PetroChina is very comfortable operating Sulige on its own."

PetroChina focused on the cost-efficient drilling and management of thousands of wells, cherry-picking experts from six regional Chinese exploration companies.

"Low cost is the lifeline for Sulige," reads a poster displayed in an open courtyard at Sulige's headquarters in the county of Wushen, Inner Mongolia.

The company cut the time needed to drill a typical 3,200-metre vertical well by two-thirds to 15 days, while the average cost of a well has fallen 40 percent over the past eight years.

Cluster wells -- with well-heads tightly grouped on the land surface but diverging in multiple directions underground -- are widely applied to reduce the use of surface infrastructure.

Instead of high-pressure fracturing to force open the cracks in rocks and allow gas to escape, PetroChina engineers came up with new ways to use low and medium-pressure fracturing.

"In the end we realized it's about applying a series of technologies, not necessarily cutting-edge, but that best suit Sulige," said Zhao Jianxin, a PetroChina manager at the field. "The sophisticated technologies provided by international companies did not work here, as they were too costly."

FEW FOREIGN ENTRANTS

Some three-quarters of China's newly proven gas reserves are tight gas, says PetroChina's Hu, led by the vast Ordos basin, which includes Sulige and spans five provinces and regions.

Ordos has a proven gas reserve of 4 trillion cubic metres, equivalent to 40 years of China's total production at the 2012 level. Projects include the Shell-operated Changbei block and the Total-invested Sulige South block.

Southwest China's Sichuan basin, where the second-largest state energy major Sinopec Corp <0386.HK> is also active, is likely to be the next major play.

However, unlike coalbed methane and shale, which have been opened up to wider competition, experts say China is unlikely to offer new tight gas contracts to companies outside PetroChina and Sinopec, beyond those already there.

"Now that they've honed the expertise and management skills -- a lot through learning from international companies -- and overcome the technological hurdles, it will be harder to see them readily offering more tight gas blocks," said an official with an international energy firm working in China, who declined to be named.

PetroChina, a proven player in boosting output at ageing and marginal oilfields in countries like Iraq, Venezuela and Algeria, also hopes to apply its tight gas know-how beyond China's borders.

PetroChina's parent, CNPC, is already applying Sulige-style engineering and drilling skills in Turkmenistan, said Hu, the largest source of China's gas imports via pipeline.

"The technological strength we have on tight gas would give us more confidence assessing similar prospects overseas," said Mao Zefeng, PetroChina's investment relations manager. (Editing by Richard Pullin)