OREANDA-NEWS. February 05, 2013. CHINA'S revolution in shale gas is more a distant dream than a work-in-progress. The latest round of bidding on shale-gas licenses shows there is much to be done.

China wants to shift its energy mix to natural gas from coal so that by 2020, 10 per cent of total energy consumption is from gas. That compares with about 4 per cent in 2010, according to Jefferies.

Production is picking up-official data showed Wednesday that natural-gas output jumped 6.7 per cent in 2012 from a year earlier. But to meet its goals, China will have to bring unconventional shale-gas production online.

The government is targeting up to 3.5 trillion cubic feet of annual shale-gas production by the end of the decade from about nothing today. That is closing in on the level of production in the US.

Available shale-gas resources are no problem. The US Energy Information Administration estimates China's technically recoverable shale-gas resources are 1275 trillion cubic feet. That may make China's reserves the biggest in the world.

But there are good grounds for skepticism about Beijing's plan. For starters, most of China's shale resources are deeper than those in the US and the sites are in difficult locations, including in mountainous regions and densely populated areas. That makes drilling and building supporting infrastructure more complex and more costly.

Also, regulated domestic gas prices, with distribution dominated by state-owned players, deter competition that would otherwise lead to more efficient aboveground infrastructure.

The recent license auction is another disappointment. The auction of 20 licenses covering almost five million acres of shale blocks drew 85 competing bids. With 95 per cent of blocks awarded, the auction was an improvement on a previous round of bidding in which half the blocks went unsold.

The problem this time, though, is that few winning bids came from companies with specific expertise in shale-gas production, according to Bernstein Research analyst Neil Beveridge. More than 80 per cent of the winning bids came from local energy companies, coal companies and power companies, suggesting the process was "more of a land grab than an effective policy to open up acreage," he says.

Certainly, Beijing's plans for shale don't lack for ambition. But matching it with practical steps toward development is proving to be tough.