AbstractThe Daniudi gas field is typically rich in ultra‐low permeability gas reservoirs in China, but its development is difficult. In this paper, pilot implementation of underbalanced horizontal well drilling technology was used in the H1 gas reservoir to develop the proved reserves effectively. Owing to the limitations of drilling technology and environmental protection, the recyclable nitrogen‐foam was ultimately chosen as a circulating medium. Through theoretical analysis and extensive laboratory tests, the optimal foaming agent composed of α‐olefin sulfonate and coco amine oxide was selected among six anionic surfactants/zwitterionic surfactants systems. The developed recyclable nitrogen‐foam has high salt resistance, temperature resistance and cycle performance, but weaker oil resistance. After the recyclable nitrogen‐foam horizontal well drilling technology was used in the H1 gas reservoir, the average rate of penetration of horizontal section increased by 118 %, ignition could be achieved during drilling and natural gas was of great potential for production. It was the first time to increase natural gas production capacity in the H1 gas reservoir using recyclable nitrogen‐foam horizontal well drilling technology. Successful application of this technology provides technical reserves for the effective development of the H1 gas reservoir.