​​​​BP Plans to Exit China's Shale Gas

European oil major BP plans to exit from two production sharing contracts (PSC) for projects drilling for shale gas in the southwestern Chinese province of Sichuan, three sources with the knowledge of the matter said this week.

BP is the last of the international oil majors, including Royal Dutch Shell (RYDAF), Exxon Mobil (XOM), ConocoPhillips (COP) and ENI, to quit exploring for shale gas in China because of poor drilling results. Its departure leaves the sector firmly in the hands of domestic companies.

In March 2016, BP agreed with China National Petroleum Corp (CNPC) to explore and produce natural gas from shale rock formations in the Neijiang-Dazu block in Sichuan, its first such contract in China.

It inked a second PSC on the Rongchangbei block later in 2016. CNPC was the operator in both deals.

BP no longer wants to proceed with the Sichuan projects after drilling eight to 10 wells with disappointing results, two of the three sources said.

One of the wells, the Wei 206-H1 that was drilled to a depth of 4,368 metres (14,300 feet) in the Neijiang-Dazu block, produced about 10,000 cubic metres a day of gas during test production, a fraction of the output from a typical CNPC shale gas well in the same geological zone, IHS Markit said in a research note.

China is only just beginning to develop its vast shale gas resources with production last year making up only 6 percent of total natural gas output, because of geology that makes gas extraction difficult and a challenging operating environment.

With BP and the other oil majors gone, PetroChina Co , CNPC's listed arm, and Sinopec Corp are likely to dominate China's shale gas sector using low-cost technology and services developed domestically.

BP's Chief Executive Officer Bob Dudley said last week at a conference in Shanghai that the Sichuan projects faced "great challenges" because of its complex geology.

To overcome those problems, BP used technology from its shale developments in the United States at the Sichuan site, Chinese business news portal The Paper reported.

BP did not immediately respond to request for comment. PetroChina declined to comment.

Zhu Kunfeng, a Beijing-based associate director of upstream research with IHS Markit, said poor economics are the key reason holding BP back from pursuing further in Sichuan.

"As the last trial for IOCs on China's shale gas, BP's decision will impact foreign firms' confidence in China's shale gas sector," Zhu said.

($1 = 6.7123 Chinese yuan renminbi)

(Reporting by Chen Aizhu in SINGAPORE and Meng Meng in SHANGHAI; editing by Christian Schmollinger)