OREANDA-NEWS. March 19, 2012. CHINA has just claimed to possess the world's largest shale gas reserves - double those of the US - but it will take time to extricate the unconventional fuel.

To spur the investment and technology needed to commercialize shale gas, analysts say, China needs to reform its highly consolidated upstream gas industry.

The Ministry of Land and Resources, in its first official estimate of shale gas reserves, said last week that the country holds 25.08 trillion cubic meters of technically recoverable deposits, citing a preliminary survey. That amount, in theory anyway, is enough to power China's gas needs for two centuries, based on current consumption.

Shale gas, tightly trapped in rock formations, has been a game changer in America, where advances in production techniques - namely, the hydraulic fracturing technology and horizontal drilling - have ended US dependence on gas imports. The US has revised down its technically recoverable holdings to 13.8 trillion cubic meters.

The latest Chinese survey, which didn't cover the remote Qinghai and Tibet regions, also estimated China's total shale gas deposits in place at 134.42 trillion cubic meters. But whether any of these big numbers mean anything, given the early stage of exploration, remain debatable.

Analysts said China faces unique geological, technical and commercial challenges in its shale gas sector. That means development in the current decade would probably be somewhat modest. China has yet to produce any shale gas commercially.

"Without major reform, we remain skeptical that shale gas development will come anywhere close to that of the US over the next decade," said Neil Beveridge, senior analyst at Sanford C. Bernstein & Co. "China faces higher production costs, infrastructure bottlenecks, and, most importantly, a regulatory landscape that remains a barrier to growth."

Rapid development phase

However, the government is determined to catch up. It is hoping to repeat the economic success of shale gas development in the US to address domestic consumption expected to triple to 300 billion cubic meters in the decade ending 2020.

Gas is a key plank in government efforts to curb pollution from coal burning. It has offered subsidies and raised the prices companies can charge for shale gas to encourage domestic exploration and development. State-owned energy producers are also being encouraged to buy into foreign shale assets to gain technological know-how.

Yu Haifeng, deputy director of the land ministry's geological exploration department, said the focus through 2015 will be on exploration-related activities. In the ensuing five years, he said, the focus will turn to the "rapid development" phase.

"We are just getting started, and our exploration technology lags far behind advanced countries," Yu told a press briefing in Beijing last week.

He added that China's shale gas output could reach 100 billion cubic meters by 2020. If that eventuates, the fuel will become an integral part of China's energy mix.

The National Development and Reform Commission, China's top planning agency, has set a goal of pumping 80 billion cubic meters of shale gas by 2020, though Beveridge said the ability to meet that target could be "questionable."

The US is planning to invest USD 1.9 trillion in shale gas development in the next two decades. The bottom line for China: There needs to be policy changes to encourage investment and greater competition in the sector. China indeed has started making changes.

The State Council, or the Cabinet, at the end of last year designated shale gas as an independent mineral. By separating it from conventional hydrocarbons, the ministry hopes to attract more players into a shale gas sector now dominated by several state-owned energy giants.

The designation "legal mineral" opens the door to production-sharing contracts with foreign companies for shale gas for the first time, Beveridge said.

Currently, Royal Dutch Shell Plc and Chevron Corp are the only two foreign companies to have signed agreements with PetroChina on shale gas exploration in China.

The land ministry also confirmed last week that it will hold one or two additional rounds of bidding for shale gas tracts this year. The first round of four block sales in southwestern China to several state-owned companies last year marked the start of commercial shale gas exploration in China.

Analysts expect privately-owned companies to be invited to bid in later rounds, but foreign companies are likely to be barred in the foreseeable future. Instead, offshore energy producers are being encouraged to partner with winning Chinese bidders.

Yu reaffirmed that China will encourage all kinds of qualified investors to participate in the shale gas sector, but he stressed that the industry must be developed in an "orderly" manner.


His wording signifies that the government doesn't want a repeat of the experience in the coal industry, where haphazard development and lax regulations have resulted in deadly accidents and serious environmental problems, mostly in smaller mines.