On June 20, the Ministry of Finance announced the Supplementary Notice on the Interim Measures for the Administration of Special Funds for Renewable Energy Development (hereinafter referred to as the “Notice”), and many new regulations on unconventional natural gas subsidies have been released . For example, the subsidy time limit will be extended to 2023, and the subsidies will be extended from shale gas, coalbed methane to tight gas.

Hereafter, several key issues has led to extensive discussions among the industry, such as how to calculate the unconventional natural gas utilization amount, how far can the new subsidy promote the development of unconventional natural gas, and whether the total amount of subsidy can be increased.

What's NEW about the subsidy?

Tight gas is subsidized. The authoritative data on the upstream situation of China's oil and gas is from the "National Oil and Gas Mineral Reserves Circular". Among them, coalbed methane and shale gas are listed as independent minerals, and the statistics of tight gas reserves and production are combined with conventional oil and gas. At present, tight gas has become the main body of unconventional natural gas in China, and it is an important support for natural gas production and reserve. In cases where China's natural gas production is well below expectations, it is necessary and timely to include tight gas in the scope of subsidies.

The subsidy period is extended. Take shale gas as an example. The initial subsidy was 0.4 yuan/m3, which was reduced to 0.3 yuan/m3 in 2016-2018 and reduced to 0.2 yuan/m3 in 2019-2020, and might be cancelled after 2021. At present, the shale gas production area that has been developed is still in the vicinity of the economic margin even if it is subsidized by the government. In the future, it will be more difficult to continue economic expansion in areas with worse geological conditions and deeper reserves. The situation of coalbed methane and tight gas is similar.

The Notice clearly states that the implementation time of subsidies is 2019-2023, which temporarily relieves concerns about the sustainability of unconventional natural gas subsidies. The start of the implementation of the subsidy is in the beginning of 2019 and is before the issuance of the Notice, contrary to the general rule that the release of general regulations usually comes before the implemention, which shows its urgency.

The subsidy is calculated based on the utilization amount. In the past, the subject of multiple energy subsidies was calculated by production amount, or even capacity or installed capacity. The "Notice" clearly states that the subject will be calculated based on the amount of exploitation, or to be more specifically, the commodity amount. The statistical method of emphasizing the commodity amount is really applicable to the market economy. From this perspective, the "Notice" has set a precedent for more market-oriented oil and gas statistics in China.

Different calculations for different gas. The Notice defined the amount for different unconvetional gas that shale gas amount equals to actual exploitation and utilization, while coalbed methane is multiplied by 1.2, and tight gas amount is calculated only by its incremental part based on 2017 production volume. It is obviously that CBM gets the highest subsidy, shale gas gets the second, and the tight gas gets the lowest. It is a good way to take into account the actual difficulty of current exploitation.

Encouraging increment and punishing decreasing. In the "Notice", the allocation coefficient of the award fund is set up, and the ladder award is calculated according to the incremental amount. For the part that exceeds the previous year's output, different distribution coefficients are given according to the excess ratio: 1.25 distribution coefficient for 0~5% increment, 1.5 for 5%~10%, and 1.75 for 10%~20%, and 2 for 20% and above. At the same time, the part of the annual production reduction is also deducted by the above ratio.

This is an innovative regulation in various subsidy policies. Based on this rule, tight gas is more likely to receive an incremental award. If China's shale gas production cannot make breakthrough outside southeast Sichuan Basin in the next 3 to 5 years, it will be difficult for shale gas to get incremental award. For coalbed methane that has been continuously reducing for past years, much more effort is required.

Promoting peak-shaving in the heating season. The "Notice" specifically treats the supply of heating seasons, and stipulates that the distribution coefficient of the unconventional natural gas incremental portion produced from January to February and November to December is uniformly set at 1.5.

Actual effect to be tested

The time-yield curve of unconventional oil and gas is L-shaped: the initial decline is high, with the yield declines rapidly. After 3 to 5 years, the natural decline rate is relatively low, and the yield is relatively stable in the long-term with slow decline rate. This is typical of shale gas production.

Taking south Sichuan as an example. The average natural decline rate in the first 4 years for a  single productoin well is 65%, 35%, 20%, 10%, and about 5% in the 5th year and later, and the average production life is 15 years. The average life-cycle production cost is 0.8 yuan/m3, which is twice the cost of conventional natural gas. By this way, the average gas production in the first year is 26 MMcm, and in the fifth year is only 4.26 MMcm, which is only 6.4% of the initial annual production.

In the case that unconventional natural gas development has passed the initial smooth stage, and further increase in reserve and production encounters some obstacles, it is difficult for developers to significantly increase the investment in unconventional oil and gas in the short term. The new subsidy method that consider incremental production as an important factor may be difficult to receive immediate results in promoting the industry. On the other hand, once the production volume is reduced, it is subject to a corresponding subsidy deduction. It is still to be tested by practice that how much the new subsidy can promote the development of unconventional gas.

Expect to increase the total amount of subsidies

It is worth noticing tht the subsidies for unconventional natural gas are from the “Special Fund for Renewable Energy Development”. This means that the unconventional subsidy is taking a share of the subsidies for renewable energy. It can also be understood that the amount of subsidies for unconventional natural gas will not be very large.

According to the explanation from MoF, the allocation and consolidation of special funds for energy subsidies was approved by the central government. In 2018, the funds for supporting coalbed methane and shale gas were about 1.09 billion yuan and 3.8 billion yuan respectively, accounting for about 82% of the special funds for renewable energy development of 5.97 billion yuan.

The new subsidy Notice focuses on how the three unconventional natural gas take a share in the total amount, while the industry is more concerned about how big total amount will be.

Judging from the current economic situation, it is quite difficult to greatly expand this fund. Another form of subsidy for the government to promote unconventional natural gas development is tax cuts. However, if these two methods are only maintained at the current level of support, it is still very difficult for unconventional natural gas to overcome the obstacles currently faced and to reach a higher level.

Fortunately, the regulations proposed by the government management have greater flexibility than the law. We can continue to sum up experience and make supplements and amendments in practice in order to promote development and deepen reform.

*Author: Zhang Kang, Deputy Director of the Advisory Committee, Sinopec Petroleum Exploration & Production Research Institute. 

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