1. China’s Unconventional Gas Resources China’s Energy Policies International Energy & Transactions Committee Brown Bag Harry Vidas Vice President, Fuels harry.vidas@icfi.com (703) 218-2745 May 13, 2013

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3. Contents 3 © 2013 ICF International. All rights reserved. Overview Shale Gas Development Gas Pipeline Infrastructure Shale Gas Development Impediments LNG Imports and Shale Development Impact Conclusion

4. Overview – China’s Shale Estimate According to the U.S. EIA, global technically recoverable shale gas resources (based on assessment in 32 countries) total 6,622 Tcf, the equivalent of 60 years of 2008 worldwide natural gas consumption. More accurate number would be 12,000 Tcf for whole world. The EIA estimates that China holds 1,275 Tcf in recoverable shale gas 48 Major Shale Gas Basins in 32 Countries

5. Overview – Shale Gas Production Technologies Horizontal drilling and hydraulic fracturing have unlocked previously inaccessible shale gas resources Shale gas production has steadily risen over the past decade through use of these upstream technologies (U.S. shale gas production now makes up 33% of total U.S. gas production) Shale gas wells are drilled 8,000-12,000 feet down and then laterally 3,000-10,000 feet Conventional and Shale Gas Resources Hydraulic Fracturing Process

6. Contents 6 © 2013 ICF International. All rights reserved. Overview Shale Gas Development Gas Pipeline Infrastructure Shale Gas Development Impediments LNG Imports and Shale Development Impact Conclusion

7. Shale Gas Development – Shale/ CBM Basins China has seven major onshore shale basins thought to contain shale gas, just two (Sichuan in the southeast and Tarim to the northwest) are suited for near-term commercial development. China’s shale and CBM basins are widely distributed, China’s shale gas production remains limited to experimental well drilling in the Sichuan basin, with aggressive plans for future development. Current activity in Sichuan Basin (60 shale gas wells completed). 7

8. Shale Gas Development – Current Estimates Shale, tight, and coalbed methane Some areas also have tight oil potential (including Ordos Basin) Most of the resource is in Sichuan Basin region; similar geologic age to Marcellus Shale 8 RegionBasinsBasin TypeAge Area (sq km) Mean Recoverable (Tcf) Yangtze RegionSichuan, Yunnan, JiangnanCratonicS, D900,000447 Northern ChinaOrdos, BohaiCratonicC, P600,000191 Northwestern ChinaJunggar, TurpanForelandP, J700,000206 Western ChinaTarimDepressionK, N500,000212 Total 1,056

9. Shale Gas Development – Current Status Most current/near term activity in Sichuan Basin 60+ shale gas completions to date; no commercial production, but commercial scale well rates (up to 5 MMcfd for horizontals and 1.5 MMcfd verticals) achieved. Government forecasts of up to 2.8 Tcf shale production by 2020; “large scale” commercial prod. forecast by EOY 2015 SINOPEC plans 38 MMcfd of shale gas by 2014 Government gas price subsidies for shale of $1.83 per Mcf; current wellhead price of about $5.30 per MMBtu; drilling costs of $5 - $12 million per well Active Companies: Shell/CNCP ―$2B shale gas capex expected through 2013; had completed 24 wells by Nov. 2012; major decision mid- decade ―production sharing contract recently approved; the first in China for shale gas 9 Date International Companies NOCsActivityLocation/BasinStatus Oct-07NewfieldCNPC Shale gas joint study Weiyuan Block, Sichuan Completed in 2008 Nov-09ShellCNPC Shale gas joint assessment Fushun- Yuangchuan Bock, Sichuan Ongoing Jan-10BPSinopec Shale gas joint assessment Kaili Block, Guizhou; Huangqiao Block, Jiangsu Ongoing May-09StatoilCNPC Shale gas joint study SichuanNegotiation 3Q 2010 Conoco Phillips CNPCShale gasSichuanPening 4Q 2010ChevronSinopec Shale gas exploration Longli Counti, Guizhou Ongoing Jul-05ShellCNPC Tight/shale gas exploration Jinqiu Block, Sichuan Ongoing Jul-11ExxonMobilSinopec Shale gas joint study Wuzhishan-Meigu Block, Sichuan Ongoing Jul-11ENISinopec MOU covering shale gas N/A Source: Gao, 2012)

10. Shale Gas Development – Production Forecasts  China’s natural gas use made up 4 percent of the energy mix in 2011, though the most recent 12 th five-year plan has a goal to increase the share of natural gas to 10 percent by 2020.  Demand currently exceeding production  Government forecast of 8 Tcf/y demand by 2015 (5 year plan) 10  China’s National Energy Administration has a goal of annual shale gas production of 228 bcf (6.5 bcm) by 2015 and 2.1 Tcf (60 bcm) by 2020, an ambitious goal, given the experimental stage of Chinese shale gas drilling and the technological/geological issues  Production of China’s unconventionals could alter the recent dynamic of increasing LNG imports

11. Contents 11 © 2013 ICF International. All rights reserved. Overview Shale Gas Development Gas Pipeline Infrastructure Shale Gas Development Impediments LNG Imports and Shale Development Impact Conclusion

12. Shale Gas Development Impediments Environmental Issues Water: fracking fluid content, chemical use/reporting, groundwater contamination, excessive water use, wastewater treatment/disposal Air emissions and climate: methane leakage, other VOCs, drilling equipment emissions, Lifecycle emissions: methane emissions limit environmental gains from natural gas use Potential challenges to shale gas production include limited pipeline access, water access, limited technical knowhow, lack of sufficient regulatory enforcement, and geological issues (e.g., deeper formations than those in the U.S.) Topography Depth Non-marine in NE areas Water availability Population density Infrastructure Wellhead prices

13. Contents 13 © 2013 ICF International. All rights reserved. Overview Shale Gas Development Gas Pipeline Infrastructure Shale Gas Development Impediments LNG Imports and Shale Development Impact Conclusion

14. Gas Pipeline Infrastructure – Total Pipelines As of 2010, China’s total gas pipeline mileage totaled 24,000 miles, which includes a gas pipeline network from Kazakhstan that connects to the West-East pipeline from Kazakhstan to Shanghai, a substantial source of gas for China. China has plans to develop other West-East pipelines, as well. Gas pipelines are owned by the state Shale gas likely to require new lines/expanded capacity CNCP controls pipelines; may not allow third party access 14 Gas Pipeline Systems Source: EIA, 2012

15. Contents 15 © 2013 ICF International. All rights reserved. Overview Shale Gas Development Gas Pipeline Infrastructure Shale Gas Development Impediments LNG Imports and Shale Development Impact Conclusion

16. LNG Imports – Terminals 16 LNG Import Terminals in China Source: Poten & Partners, 2010 2012 Imports 1.9 bcfd Existing terminal capacity 2.9 bcfd 2.1 bcfd now under construction. Adding in planned terminals would bring total capacity [E+UC+P] to 11.2 bcfd.

17. LNG Imports – Global LNG Trade Forecasts LNG import demand exceeded 30 Bcfd in 2011, and is expected to grow another 39 to 57 Bcfd by 2035. Wide range of estimates on China’s LNG demand. Historical World LNG Imports by Region (2004-2011) World LNG Demand Forecasts

18. LNG Imports – Global LNG Trade Forecasts Globally, roughly 63 non-U.S. LNG export projects are underway or in the planning phase, with an estimated total capacity of 50.5 Bcfd; other projects are expected, as well Just as U.S. unconventional production is expected to make a significant impact on global LNG markets, China’s successful unconventionals development could fundamentally alter global LNG trends. Supply Curve of LNG Supply Projects under Construction or Proposed

19. Contents 19 © 2013 ICF International. All rights reserved. Overview Shale Gas Development Gas Pipeline Infrastructure Shale Gas Development Impediments LNG Imports and Shale Development Impact Conclusion

20. China’s current estimates for unconventional gas resources are significant, with current development seen in selected basins Successful development of China’s unconventional natural gas resources could alter the country’s energy mix and international LNG trade trends, similar to trends seen in U.S. gas development However, China’s energy growth needs and low starting base for natural gas consumption could mean limited effects on international natural gas trends, as domestic demand could still significantly outpace domestic production Impediments, including water usage and geological uncertainties mean that China’s successful unconventional gas development remains unclear