Unconventional resources have long been a focus of attention for China’s state oil and gas majors, but developing them has been a challenge.

By Irina Slav | Published by OilPrice.com

Summary

China has taken a significant step towards developing more of its oil and gas reserves, including unconventional ones, by establishing a new umbrella company that groups all the state majors. This company is tasked with drilling for ultradeep oil and gas and exploring shale formations within China.

The new entity includes not only oil giants like CNPC and Sinopec but also companies from other industries such as China Aerospace Science and Industry Corp, steelmaker Baowu, equipment manufacturer Sinomach, and Dongfang Electric Group, which produces power generators. The goal is to cover as much of the oilfield supply chain locally as possible, facilitating exploration and ultimately production.

In 2023, China produced around 4.2 million barrels of oil daily, and its total crude oil production for the year reached 208 million tons, which was 3 million tons more than the previous year. Natural gas output also increased, with total production reaching 230 billion cubic meters, of which 96 billion cubic meters came from unconventional resources.

Despite China’s focus on renewable energy sources like wind and solar, the move to develop ultradeep and unconventional hydrocarbon resources is seen as a logical step to boost energy security. The country’s energy philosophy is to not exclude any source of energy from its mix and to prioritize the development of local resources.

The challenges in developing unconventional resources, such as the Cambrian shale in the Sichuan province, are significant, with it taking close to 15 years for PetroChina to begin commercial production (whereas, in the U.S. shale patch, wells take months to drill and begin production). The reason it took so long was the old stratigraphic age of the formation, meaning the layers of rock were old and harder to drill through, and the fact that the reservoir was at a deeper level than reservoirs are elsewhere. Yet China appears bent on developing as much of its local oil and gas reserves as possible in a strategy that could have been useful to some European countries had they not nurtured influential climate activist lobbies.

In addition to its efforts in the hydrocarbon sector, China is also dealing with the challenges of managing its renewable energy capacity. The country has faced issues with curtailment rates, where wind and solar generators are allowed to dump excess supply to avoid overloading the grid. The curtailment ceiling has been doubled from 5% to 10%, indicating a significant amount of excess supply.

China’s approach to energy is pragmatic, focusing on what works and where its limits are. No source of energy is denied a place in the energy mix, and local resource development is a priority. The development of ultrahigh transmission lines aims to reduce the need for wind and solar curtailment, while efforts continue to develop hydrocarbon resources. The overarching priority for Beijing is energy security, rather than decarbonization or energy dominance.

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