China taps shale gas through combined efforts

China is exploring an optimized energy structure by tapping into shale gas resources through the joint efforts of local authorities, enterprises and researchers.

The country’s second round of auctions for shale gas licenses, which will be held in late October, has elicited substantial interest from more than 70 domestic companies, including Sinopec and PetroChina, the country’s two largest oil producers.

The nation will offer 20 shale gas blocks with a total acreage of 20,002 square kilometers in the upcoming auction, according to a statement issued by the Ministry of Land and Resources (MLR) in early September.

The figures are sharply up from the first auction in 2011, when six companies bid for a total of four blocks.

Analysts said that by 2020, if the nation’s shale gas output can reach 60 to 100 billion cubic meters, it would become one of China’s primary energy sources.


The forthcoming auction welcomes both state-owned and private enterprises and is also open to foreign investment, to a certain extent.

According to the MLR statement, any domestic company or Chinese holding Sino-foreign joint venture registered with capital exceeding 300 million yuan (about 48 million U.S. dollars) and qualified for gaseous mineral exploration may join the bidding.

The participation of private firms at the initial stage of shale gas exploration could provide a substantial boost to the sector, as they bring in capital and possible technical innovations, analysts said.

Many private companies are now actively exploring less costly drilling techniques and making positive progress, they added.

But high risks, huge costs and a long return cycle may still keep out private players without sufficient cash flow.

Shale gas is an expensive business. The exploration and drilling alone may cost hundreds of millions of yuan, not to mention the subsequent construction of pipeline networks and other facilities.

To mitigate the risks shouldered by private companies, some local governments have taken the initiative to facilitate the collaboration between state-run oil giants and their smaller private peers.

Southwest China’s Sichuan Province, which owns one of China’s first shale gas drilling sites, inked an agreement with Sinopec in July. According to the agreement, Sinopec will lead the construction of the province’s shale gas pilot project while allowing private capital in with minimized risk.

Experts also expect the MLR to chart smaller blocks to attract more private firms in the auction.


Technical hurdles are another challenge facing the nascent energy sector.

After the United States’ successful exploration of unconventional mineral gases, many countries rich in shale gas reserves have turned to the clean, highly efficient energy source, especially amid the recent oil price hikes on the global market.

But experts said that imported foreign exploitation technology may not be well-suited to China’s geological conditions, and Chinese companies have to work out their own way instead of relying heavily on foreign know-how.

Experts also worried that shale gas exploitation would face the same plight as natural gases.

“As shale gas production scales up, problems such as insufficient infrastructure will become bottlenecks for exploitation,” said Zhang Dawei, an analyst with the Strategic Research Center of Oil and Gas Resources under the MLR.

In the U.S., the extensive pipeline network for natural gases has greatly reduced the cost of exploiting shale gas, whereas China’s current pricing mechanism for natural gases has kept investors away, experts said.

The authority should grant more third-party access into network facilities to encourage a more open, efficient marketplace, experts suggested.

To address the issue, Chinese energy authorities and executives met with their U.S. counterparts on a forum in San Antonio, Texas, in mid-September to discuss the role the government could play in regulating shale gas exploitation and managing subsequent safety and environmental problems.


The nation is now mulling favorable policies, including introducing subsidies and tax breaks for the sector to support its development, an official with the MLR said in late September.

Prior to any specific incentive being rolled out, local governments and individual enterprises have long been preparing to broaden their shares of the fledgling business.

“Both local authorities and companies are reaching out for the future. The returns might be small at the present, but they have formed their goals of development,” an energy analyst told Xinhua’s Outlook Weekly.

One of the latest moves took place in August in Southwest China’s Chongqing Municipality, in which the municipal government set itself a shale gas annual output target of 1.3-1.5 billion cubic meters by 2015.

The recoverable reserves of the region are now estimated at 2.05 trillion cubic meters.

Earlier in June, Jiangxi Province founded the country’s first research institute specializing in shale gas exploitation. The eastern province is also one of the national pioneers in the geological survey and assessment of shale gas reserves.

Domestic companies, including the five state-run energy giants and provincial-level energy firms are also eyeing the future of the shale gas boom, strengthening their cooperation ties with local governments.

Coal-fired thermal power, which accounts for about 70 percent of China’s power capacity, has made power companies very susceptible to coal price fluctuations.

The development of the new, alternative energy source could help taper down the coal price hikes, and power companies would have more say in negotiations with their coal suppliers, industry insiders said.

Earlier media reports said China aims to pump 6.5 billion cubic meters of shale gas by 2015, and the commercialization of shale gas production can be expected in the 13th Five-Year Plan period (2016-2020).


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