China: in search of shale - unconventional gas exploration and production

Materials World magazine
1 Aug 2013

Michael Forrest talks to Paul Atherley, Managing Director of Australian company Leyshon Resources Ltd, about unconventional gas exploration and production in China.

In the USA, shale gas has proven to be a revolution in the energy market. Like other hydrocarbons, is it generated by the chemical degradation of organic carbon in sedimentary sequences, however unlike oil and natural gas it has remained in situ. The method of releasing gas from these sedimentary horizons was devised for the recovery of oil and gas from conventional wells when natural flow pressure declined. The process of hydraulic fracturing of the host rock allows the gas to escape so that it can be pumped to the surface. Oil-well fracking, which has been carried out for decades, is a tried and tested technique that uses water and sand under high pressure to expand and keep open any naturally occurring weakness in the rock. A low dilution of chemicals (about 0.5%) such as guar gum is used to increase the viscosity of the sand–water mixture and ensure free flow into the disrupted fractures.

Shale gas horizons are present in all seven continents, with large resources in remote areas such as Saharan North Africa, central Australia and southern Argentina. They are also found in highly populated areas such as midwest USA, southeast Brazil and in sedimentary basins in central China. Resources in these countries are estimated at 24.4 trillion cubic metres (tcm) in the USA, 21.9tcm in Argentina and 36.1tcm in China (EIA, 2011). For comparison, one tcm has the energy equivalent of 900Mt of oil, or 6,597Mbbl.

Leyshon Resources Ltd, which is joint-listed on the Australian and London Stock Exchanges, has a long history of operating in China. In 2003, the company took advantage of the Chinese mining industry opening up to foreign companies and developed its Zheng Guang gold mine that it later sold in 2009. Since then, Leyshon has been investing in developing extensive hydrocarbon assets in the Ordos Basin, which covers 370,000km2 across Gansu and Shaanxi provinces, and Ningxia and Inner Mongolia autonomous regions in the midwestern region of the country. Paul Atherley, Managing Director at Leyshon, explains, ‘Although China is the largest coal mining and coal burning country in the world, it is planning to create a low-carbon energy mix’. Drivers for this policy include air pollution, which significantly affects many of the northern cities, and a reduced dependency on coal, which accounts for nearly 70% of electrical power generation. Growth in urbanisation and living standards have also increased the demand for power, while the fast-growing car ownership demands more petroleum products.

This decarbonisation will be based on the construction of 25 new nuclear stations, accelerated wind and solar power (China has the largest installed capacity), and natural gas. It will also require a 1% annual reduction in thermal coal consumption. ‘China has some very large hydrocarbon basins, and we are exploring and producing in the second largest basin, Ordos,’ says Atherley.

Roughly bisected by the Great Wall of China, the Ordos Basin sits on a cratonic basement of metamorphosed Archean and Proterozoic rocks. These are covered by sediments that span the length of the full geological column, from Cambrian (500Ma) to present day, extending from 5,000m to a maximum of 10,000m. It is relatively undisturbed, with a gentle dip of less than one degree to the west, offering good preservation. The highly organic black shales of Carboniferous to Permian age within the basin are dominated by type III kerogens favourable for gas generation. Although it is the second largest hydrocarbon basin, Ordos contains nearly 6% of China’s natural gas, 13% of coal-bed methane and 20% of coal resources. With 10Bt of oil, it is also China’s fourth largest oil field.

Exploring Ordos
In 2012, Leyshon acquired Pacific Asia Petroleum Ltd (PAPL), which had a production sharing contract with the China National Petroleum Corp (CNPC). PAPL has agreed with CNPC to undertake exploration in the eastern part of the Ordos Basin, the location of the 705km2 Zijinshan unconventional gas project. Immediately after acquiring PAPL, Leyshon sank two wells in what is the central depression area of the Ordos basin, and was rewarded with gas flow characteristics of the nearby Sanjiabei and Linxing discoveries of Sino Gas and Energy.

In November 2012, the first of these wells – ZJS5, which lies at the centre of Leyshon’s 380km2 holdings – was completed to a depth of 2,155m. Following logging and side-wall core sampling, initial results indicated two zones with potential for gas flow. By December 2012, drilling was well underway on the second borehole, ZJS6, and had reached a depth of 800m of the planned 2,320m. Although economic flows will not take place without fracking, this was not carried out during these coldest months. However, by May 2013, the company had completed hydraulic stimulation on ZJS5 and within one of the two target zones, a gas flow equivalent of 160,000 standard cubic feet (scf) a day over a period of eight hours, with pressure reaching 200psi. At that point, the well was closed for a period to allow for formation pressure tests. ‘The gas flow is 35,000scf a day above what is considered economic by our engineers and industry standards,’ says Atherley, who adds, ‘we await the flow test results from the neighbouring ZJS6 well’. Results from both these drill logs along with newly acquired seismic data will determine the location of ZJS7.

Following this success, the company has embarked on an accelerated exploration programme with a budget of US$20m. This will comprise drilling of up to six wells and completion of eight flow tests, together with a 2D geophysical survey of 300km of lines. Leyshon’s aim is to define information for a third party independent resource statement by the end of 2013 and to submit a Chinese Reserve Report (CRR) by mid-2014.

The company’s agreement with CNPC allows the Chinese Government to back 40% of the Zijinshan project, ensuring full support to production on successful delineation of resources. The Government sees its dependence on imported oil, which has been exacerbated by a rapid growth in the automotive sector, as grave challenges to energy security. The second problem is air pollution in the northern cities of China, particularly in Beijing where in winter, it has been measured at 40 times the maximum level considered healthy by the World Health Organisation.

It will be a tough challenge for the country to meet the rapid progress in unconventional gas production that has already been achieved in the USA, which has already imported 5% less oil and gas since President Obama took office and plans to be energy self-sufficient by 2035. Part of this challenge lies in expanding exploration and production of unconventional gas, but so far, China has fewer than 100 unconventional gas wells, while the USA has more than 100,000. For now, only time will tell to what extent Leyshon can help China to become a successful player in what looks to be an inevitable global shale gas revolution.