Country has large reserves but location makes exploration difficult

Water shortages pose a huge hurdle to China's development of its shale gas reserves, a report warned on Tuesday.

The Washington-based World Resources Institute found that 38 percent of global shale resources face high to extremely high water stress or arid conditions. Water is critical in hydraulic fracturing (also called fracking), a technique used to extract shale gas.

"In China, we found large amounts of shale resources. However, most of these are located in areas of water stress," Paul Reig, an associate at the WRI and the lead author, told a conference call.

More than 60 percent of China's shale resources are in areas of high to extremely high baseline water stress or arid conditions. This situation places China among eight of the top 20 countries with the largest shale gas resources that also face water constraints in developing those deposits.

Baseline water stress refers to the ratio of total water withdrawals to available renewable supply in an area.

According to the report, Global Shale Gas Development: Water Availability & Business Risk, the Sichuan play, now China's most commercially viable shale resource, combines areas of low and very high baseline water stress.

More than 95 percent of the Tarim play in the Xinjiang Uygur autonomous region is subject to extremely high baseline water stress or arid conditions.

In the exploration industry, plays are formations with significant accumulations of natural gas that have similar geologic and geographic properties.

These conditions pose major challenges for companies that want to develop these resources, which are also often in areas of high population density, the report said.

"With many countries already facing arid conditions and high water stress ... this report can help to ensure that there's enough water available for industries, farms and people, even if shale development advances," Reig said. "There are smart and practical steps that countries and businesses can take to help reduce the water risks posed by future shale development."

The report made recommendations to help governments, companies and the public protect water security while minimizing business risks.

They include conducting water risk assessments; increasing transparency; establishing ties with local regulators, communities and industries; and minimizing fresh water use.

The report said that companies operating in areas where water supply is an issue must compete with other users for scarce resources. High levels of competition among agricultural, domestic and industrial water users could drive up costs and increase regulatory uncertainty for operators that need water for fracking and drilling operations.

The Tarim and Junngar plays in Xinjiang are dominated by arid and low water use conditions, and very high surface and groundwater stress. Those conditions mean that oil and natural gas operators could face significant financial risks as they access and transport water, according to the report.

Developers in densely populated areas where water supplies show medium to high seasonal variability, such as the Sichuan and most other Chinese plays, may face significant regulatory and reputational risks if water-intensive work is conducted "irresponsibly" during drier periods, the report said.

"We want to make sure that we're not competing with fresh water resources," said Cal Cooper, director of special projects and emerging technologies at United States-based Apache Corp, an oil and gas exploration and production company.

Cooper, who worked in China years ago, said that Chinese scientists are very aware of the different types of water that are available in the western parts of the nation.

China has the world's largest technically recoverable shale gas resources and the third-largest technically recoverable tight oil resources. In its 12th Five-Year Plan (2011-15), China set a goal of producing 6.5 billion cubic meters of shale gas by the final year of the plan.

Sarah Forbes, a senior associate at the WRI, said earlier that fracking that volume of shale gas would require 13.8 bcm of water. By comparison, the entire Chinese industrial sector uses about 35 bcm of water a year.

China produced 200 million cubic meters of shale gas in 2013, nearly eight times the 2012 output.

Xu Xinxiong, director of the National Energy Administration, told reporters last month that China's shale gas target for 2020 would be 30 bcm, about half of the 60 bcm to 80 bcm target for that year set in 2012.