China produces commercially viable natural gas from deeper shale formations

Brief analysis

September 30, 2024

Data source: Advanced Resources International, Inc.

China is a major pipeline importer of natural gas and the world's largest importer of liquefied natural gas (LNG). Over the past decade, the Chinese government has actively supported the development of unconventional natural gas resources to reduce import dependence and increase energy security.

According to a report by S&P Global Commodity Insights (SPGCI), in 2023, China National Petroleum Corporation (CNPC) produced natural gas from shale in the Lower Cambrian formation of the Sichuan Basin at a depth of more than 14,760 feet, which was the first time that this was used commercially. Useful natural gas was produced from this deeper formation. SPGCI reported that the Zi 201 well initially produced 26.1 million cubic feet per day (MMcf/d), a commercial rate that could mark the Cambrian Formation's entry into a new phase of large-scale shale gas production.

Currently, only two of China's national oil companies – CNPC and China Petroleum and Chemical Corporation (Sinopec) – produce shale gas, mainly from existing fields in the Silurian Longmaxi Formation of the Sichuan Basin. With an average depth of 11,500 feet, the Silurian Longmaxi Shale Formation is shallower than the Lower Cambrian.

China's domestic shale gas production averaged 2.51 billion cubic feet per day (Bcf/d) in 2023, up from 0.02 Bcf/d in 2013, according to data compiled by SPGCI. Since 2013, Chinese companies have gained a better geological understanding of shale formations and deployed more advanced hydraulics and automation techniques, resulting in a steady increase in shale gas production. However, we estimate that shale gas accounted for only 12% of China's domestic natural gas production of 21.7 billion cubic feet per day in 2023, as geological and cost issues have hampered faster development. In 2023, China's natural gas imports averaged 16.0 Bcf/d, accounting for 42% of China's total natural gas supply, compared to 15% of China's supply in 2010.

Data source: S&P Global Inc., S&P Global Commodity Insights, 2024; Sinopec, Annual report 2023
Note: Sinopec=the China Petroleum and Chemical Corporation; CNPC=the China National Petroleum Corporation

In 2018, China's Ministry of Finance and State Tax Administration introduced a preferential tax policy to reduce the resource tax on shale gas production from 6.0% to 4.2%. Last year, this policy was extended until December 2027.

After the release of China's 14th Five-Year Plan in 2021, policies continued to support the development of unconventional natural gas resources. Production from unconventional formations such as tight gas, shale gas and coalbed methane in China averaged 8.6 Bcf/d in 2023.

Currently, China is one of four countries in the world where shale gas is being produced in commercial quantities. The others are the United States, Canada and Argentina. Our Worldwide Shale Resource Assessments The 2015 report estimated 1,115 trillion cubic feet of technically recoverable shale gas resources from China's seven most promising natural gas basins. More than half of these resources are in the Sichuan Basin (626 trillion cubic feet). The southwestern region of the Sichuan Basin dominates China's shale leasing and drilling activities as it offers China's best combination of favorable geology, flat surface conditions for accessibility, existing pipelines, abundant water supplies and access to major urban natural gas markets. Other parts of the Sichuan Basin are structurally or topographically complex or have elevated levels of hydrogen sulfide (H₂S) Contamination that makes commercial shale gas production more difficult.

Main authors: Faouzi Aloulou, Victoria Zaretskaya