Well casing failures experienced by Shell in CHINA

While energy-Hungry China Struggles to Join Shale-Gas Revolution, Royal Dutch Shell Finds Drilling for Shale Gas in China Isn’t Easy

While this article is essentially about China’s shale gas plans read it carefully to pick up the issues with casings geology and water pollution. Royal Dutch Shell are keen to start fracking in the Karoo – arguably a very difficult place laced with dolerite sills and dykes.

MAOBA, China—When Royal Dutch Shell RDSB.LN -0.05% PLC began a multibillion-dollar effort to tap China shale gas a few years ago, it seemed like a can’t-miss wager. China has the world’s most extensive shale gas reserves, biggest energy market, and a government pushing for expanded gas production.

But for Shell and its state-controlled partner, China National Petroleum Corp. the reality on the ground makes its bet look riskier.

The region’s rough terrain, poor infrastructure and deeply buried gas formations present tough technical challenges. The area is so densely populated and intensely farmed that drilling sites are being built within 360 feet of homes in villages like Maoba—upsetting residents who complain of noise, dust and environmental concerns. To ease the way, Shell and its partners are compensating local residents and local government officials for using their land and roads and other inconveniences.
Shell’s experience in China, where it is charging ahead faster than competitors, shows how replicating the U.S. shale boom won’t be easy. While other countries have shale gas—China, Argentina and Algeria have bigger reserves than the U.S., according to the U.S. Energy Information Administration—a range of obstacles make tapping those resources far tougher than in places like Texas and Pennsylvania.

Some shale-rich countries, including China, are short on developed roads, water and drilling contractors trained in modern safety standards. Others like France and Bulgaria have put up legal barriers to the hydraulic fracturing needed to extract shale gas.

And unlike in the U.S., where landowners generally own rights to gas beneath their property, minerals in many countries are owned by the state, giving residents little financial incentive to support drilling near their homes.

From May 2010—when Shell was conducting early exploration in the region—to March 2013, the company lost 535 days of work across 19 wells due to “spontaneous village based blockades” or government requests to halt operations, company officials said in a March paper delivered at an industry conference. Many of the villagers’ complaints stemmed from money disputes, the paper says.

Shell officials say the company is in the preliminary stages of its China shale project—it has only drilled about 30 wells—and it is too early to determine success or failure. They say drilling is on schedule, and that dealing with dense populations and difficult geology are the sorts of challenges energy companies often encounter when they move into new regions. Shell hasn’t released a cost estimate for the project, though the company said it is spending $1 billion a year on developing unconventional energy in China such as shale gas.

The rock itself in China is more difficult to extract gas from. There are high underground stresses, and Shell experienced some deformed well casings early in China drilling, according to a March paper published by Shell employees. “In general, you have to drill deeper” in China to reach shale gas, said Shell Chief Technology Officer Gerald Schotman.

Regulatory concerns also heighten China risks. The country hasn’t finalized fracking regulations. And to fight inflation, the government controls prices at which gas may be sold, which could weigh on profits.

Even so, China’s growing energy consumption, big reserves and a state push to replace coal power with cleaner gas make it an alluring target for big oil companies like Shell.

“Natural gas has the potential to spark an energy revolution similar to the one already under way in North America,” Shell Chief Executive Officer Peter Voser said during a speech last year in China at the Central Party School.

The Chinese government is backing shale development because it could lessen dependence on imported gas and polluting coal. China says it aims to raise natural gas to 8% of total energy consumption by 2015, up from about 4% in 2010. The government set an ambitious target to produce 6.5 billion cubic meters of shale gas annually by 2015, up from almost nothing last year.

China is particularly appealing for Shell, since it has missed out on much of the profit from the U.S. shale-gas boom. Smaller firms pioneered fracking in the U.S., snapping up many of the richest drilling sites. By the time big companies like Shell and Exxon Mobil Corp. XOM -0.11% bought in, they paid premium prices just when gas prices were declining.

As early as 2006, Shell leaders discussed tapping Chinese shale with government officials, say people familiar with the talks. But some Shell executives remained skeptical due to China’s limited water, unknown geology and population density.

Some Shell executives were also wary of deals with Chinese state-run companies, say people involved in Shell’s China deliberations. A decade of talks with Chinese officials ending in the early 2000s over other natural-gas infrastructure resulted in less business for Shell than executives anticipated, these people say.

But by 2011, when members of Shell’s board of directors visited China, wariness was dissipating as Shell felt urgency to capitalize on the shale boom. To Shell’s board members who visited remote shale fields in China, the country seemed like a promising alternative to North America, says a person who attended the trip.

Shell and China National Petroleum Corp. struck gas in an early shale exploration well in 2011. Then in 2012, Shell jumped ahead of its competitors to become the first—and so far only—foreign company to finalize a production sharing contract with CNPC in the Sichuan Basin. Shell’s competitors, including ConocoPhillips Co.COP +0.63% and Chevron Corp., CVX -0.13% also are exploring China shale, but haven’t made such a big commitment.

While Shell tried to move quickly to start producing in China, the company and its Chinese partner encountered bureaucratic, political and physical obstacles. Government regulators took about a year to approve the formal Shell-CNPC arrangement.

Protests by residents and local officials resulted in lost work days at drilling sites as Shell began work in “some of the most densely populated and intensively farmed agricultural land in the world,” Shell officials wrote in the March industry-conference report.

To cope with a crowded landscape, engineers said they reduced the size of drilling pads to just over 1.5 acres from about 2.5 acres. That limited the number of wells they can drill from a single site.

Safety is also a concern. While the company says it conforms to international safety norms, some “stakeholders” in the drilling projects have an apparent “misalignment of expectations” about how to interpret safety guidelines, Shell workers wrote in the March paper. The company declined to comment further.

Meanwhile, power and water shortages added complications. In order to avoid competing with farmers for groundwater, the drilling companies built “extensive networks of temporary PVC piping” and storage tanks to supply drilling sites, the officials wrote. The region’s unreliable power supply meant Shell had to install backup diesel generators, company officials wrote in another report earlier this year.

In Maoba, where drilling began in April, workers arrived first to upgrade local roads, a move initially welcomed by villagers. Then the trucks began hauling equipment, kicking up dust and dirt residents say forced them to shut their windows.

Adjacent to the Shell-CNPC worksite in Maoba, a husband and wife who raise and sell fish from a small pond initially welcomed the project. The wife says the new gravel roads were safer when it rained.

But after drilling picked up, the couple says, they noticed their fish dying. They say they suspected sewage from the drilling site and confronted workers, who denied responsibility. A Shell site official said sewage is trucked out of Maoba, so it was impossible that sewage from the site contaminated the pond. The official said a drought and heat wave may have killed the fish.

Maoba resident Deng Fagui says he is concerned the operations damaged water quality. On his farmhouse porch one recent morning, Mr. Deng said the groundwater he pumps for drinking and bathing has been off color since around the time drilling began. Shell says it takes measures to ensure local groundwater isn’t polluted.

Shell compensates villagers for land use and other inconveniences. A person who loses a field measuring one mu—a traditional Chinese measurement equal to about 700 square meters, or about 7,500 square feet—would likely receive at least 8,400 yuan ($1,400) over two years in compensation, according to local government official Chen Jiayou. Shell says payments are transferred to higher-level township governments, which distribute them to village-level leaders, in some cases as cash.

Other payments that Shell reimburses its partners in China for also end up as cash given to local officials, according to a Shell spokeswoman. Shell said in a statement that it “follows the government laws and regulations in terms of standards and procedures” for doling out compensation, and that it doesn’t make payments in cash, which would violate corporate policy aimed at preventing bribery. But it said that Shell contractors or subcontractors might make cash payments out of “operational convenience” and bill Shell for the costs.

Maoba’s village chief Deng Yuguo says he received a cash payment late last year from the companies drilling in Maoba of around 14,000 yuan to use in local road repairs. Shell said the payment was made as a bank transfer to township-level officials on behalf of Shell’s joint venture with CNPC, and those officials converted it to cash for Mr. Deng. Mr. Deng said the funds haven’t yet been spent.

%d bloggers like this: