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 a significant moment in China’s energy sector, as it is the first time that specific cost details about shale gas mining have been disclosed publicly. Although the data may not be fully comprehensive, it highlights a critical issue: 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 shared these insights, emphasizing the potential risks associated with high drilling expenses. Honghua Group, a well-known oil rig manufacturer in China, was subcontracted by Schlumberger Changhe Oilfield Engineering Co., Ltd. for a project located in Yibin, Sichuan. Changhe Oilfield serves as a key engineering contractor for PetroChina's shale gas wells.
According to a multinational investment bank analyst, general drilling costs typically account for 20%-30% of total project expenses. Based on this, the estimated cost per well in the Changhe Oilfield project could range between 50 million and 80 million yuan. However, the daily production of such wells is only around 20,000-30,000 cubic meters, which raises concerns about profitability. If this trend continues, it could explain why many companies holding shale gas blocks have been hesitant to begin construction.
In the second round of shale gas block bidding by the Ministry of Land and Resources, only Huadian Group has planned to start drilling the first vertical well in Puyang, Guizhou. Its project budget is approximately 40 million yuan, further highlighting the financial challenges involved.
Despite the high costs, Honghua Group has successfully completed the project in Yibin, overcoming complex geological conditions. The drilling reached a depth of 4,115 meters, exceeding the designed depth of 3,960 meters. This achievement showcases the company's technical capabilities but also underscores the difficulties inherent in China's shale gas industry.
Since the initial shale gas bidding in 2011, the concept of shale gas has sparked widespread speculation in the capital market, with related stocks like Jereh seeing significant price increases. However, major players such as Sinopec, PetroChina, and Huadian Group have not released detailed cost information, making Honghua's disclosure particularly valuable to investors.
Analysts warn that if the project becomes operational, Sichuan Changning may face substantial investment risks. With natural gas prices at 2.143 yuan per cubic meter and government subsidies of 0.4 yuan per cubic meter, the gross income for the first year could be between 18 million and 27 million yuan. However, production declines sharply after the first year, leading to potential losses.
While the first well is a test, subsequent projects may see reduced costs, but current pricing still makes it difficult to avoid losses. Since the 2011 shale gas bidding, only a few successful bidders have moved forward with actual projects, while others remain cautious.
Industry experts emphasize that the success of shale gas projects in China depends on whether production can reach break-even levels. A key benchmark is 70,000 cubic meters per day, as seen in Sinopec’s Daanzhai project. Despite initial success, the project faced numerous challenges, including difficult terrain, limited access, and high drilling costs.
As the shale gas sector continues to develop, private enterprises must proceed with caution. The U.S. shale gas revolution inspired many to invest, but China's unique geological and technical conditions make the situation far more complex. Even with rising gas prices, the gap between U.S. and Chinese costs remains significant.
Ultimately, while China has the potential to develop its shale gas resources, the economic feasibility of large-scale projects remains uncertain. Investors and companies alike must carefully evaluate the risks before committing to long-term investments in this emerging sector.
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