Honghua Group recently announced the completion of its first domestic shale gas drilling service project, with a contract value of approximately 17.3 million yuan. This marks the first time in China that specific cost details about shale gas mining have been disclosed, albeit partially. According to estimates, the drilling costs in China are significantly higher than those in North America, casting doubt on the economic viability of the country's shale gas boom.
On December 16, an insider from Sinopec headquarters confirmed that this revelation has raised concerns about the financial risks associated with shale gas development. Honghua Group, a well-known Chinese oil rig manufacturer, was subcontracted by Schlumberger Changhe Oilfield Engineering Co., Ltd. for a project located in Yibin, Sichuan. The project serves as a key engineering contractor for PetroChina’s shale gas wells.
A senior analyst from a multinational investment bank noted that general drilling costs typically account for 20% to 30% of the total project expenses. Based on this, the estimated cost per well at Changhe Oilfield could reach between 50 million and 80 million yuan. However, the daily output of such wells is only around 20,000 to 30,000 cubic meters, which may lead to significant losses for PetroChina. This could explain why many companies that have secured shale gas blocks are hesitant to begin construction.
It is reported that among the 19 blocks awarded in the second round of shale gas bidding by the Ministry of Land and Resources, only Huadian Group plans to start drilling the first vertical well in Puyang, Guizhou, with a project budget of about 40 million yuan.
According to sources, the Changhe Oilfield project is operated by Sichuan Changning Natural Gas Co., Ltd., a joint venture between PetroChina and the Sichuan local government. Honghua provided services such as drilling, oil-based mud, cementing, and completion, along with self-made tools like personnel and top drives. The total contract value amounted to 17.3 million yuan.
After 90 days of intense work, Honghua successfully overcame multiple complex geological challenges and completed the drilling operation. The well reached a depth of 4,115 meters—155 meters deeper than the designed depth of 3,960 meters.
Since the first round of shale gas bidding in 2011, the concept of shale gas has become a hot topic in the capital market, with related stocks like Jereh rising over 100%. However, despite successful production by Sinopec and PetroChina, and Huadian Group obtaining shale gas blocks, no official cost data has been disclosed.
Therefore, the information released by Honghua has become highly valuable for investors. A multinational investment bank analyst warned that once the project is officially operational, Sichuan Changning may face substantial investment risks.
According to Wang Ruiqi, an analyst at Xiwang Energy, the gross income for the first year of a well could range between 18 million and 27 million yuan, based on current gas prices and subsidies. However, due to the steep decline in production after the first year, the well may not recover its costs, leading to potential losses.
Although the initial well is a test, subsequent drilling costs are expected to decrease. Nonetheless, at current prices, it remains difficult to avoid the risk of losses. Since the 2011 shale gas bidding, while many companies participated, only a few, such as Sinopec, Henan CBM, and Huadian Group, have moved forward with actual investment plans.
Regarding the industry's warnings about investment risks, Sinopec and other relevant parties have yet to respond publicly.
The warning line for profitability is considered to be around 70,000 cubic meters per day. According to experts, this is the break-even point for shale gas projects. For example, the Daanzhai project, Sinopec’s first shale gas project, achieved a daily output of 110,000 cubic meters, but faced numerous challenges, including difficult terrain, limited access, and high drilling costs.
Despite these challenges, the project showed promising revenue potential. However, the high operational costs and logistical difficulties continue to pose significant hurdles for private enterprises entering the shale gas sector.
In conclusion, while the U.S. shale gas revolution inspired many Chinese companies to invest in shale gas, the differences in geological conditions and technical capabilities make the Chinese market far more challenging. As one executive from a multinational oil company stated, “Private enterprises should proceed with caution.â€
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