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More upstream players key to Chinese shale gas plans

Government is also considering offering pricing and other incentives

China, which is estimated to hold more shale gas than the US, will hold its second shale-gas licensing round in the fourth quarter. And, says deputy director of oil and gas strategy research at the Ministry of Land and Resources (MLR) Zhang Dawei, more domestic companies will be invited to take part in the auction than in the first round, held in July.

The government is working hard to draft regulations to encourage the development of its nascent shale industry. One initiative may be to treat shale gas separately from conventional hydrocarbons to encourage companies outside the state-owned industry to invest. The government is also considering offering pricing and other incentives.

By making shale gas a separate resource, China hopes to attract smaller companies, believing the huge number of independent explorers in the US was crucial for that country’s shale-gas success.

China’s first shale-gas tender was open to only six domestic state-owned firms. Sinopec won the rights to explore the Nanchuan block in the country’s southwest; and Henan Coal Seam Gas Development and Utilization will search for shale gas in the Xiushan block, in the same region. But companies such as Sinochem, Citic Resources, Xinjiang Guanghui and Zhenhua Oil were not allowed to participate.

Joint ventures

Foreign companies were also barred, but have since entered joint ventures to tap shale-gas assets, including supermajor Shell. In September, the MLR said that some future blocks could be opened to both foreign and domestic firms.

The nation aims to produce 6.5 billion cubic metres a year (cm/y) of shale gas by 2015, under a government plan to be released by the end of the year, according to China Securities Journal, which cited an official at state-owned China National Petroleum Corporation (CNPC). And China is targeting production of 80 billion cm/y by 2020 under the plan drafted by the National Energy Administration, according to Song Xiaodan, deputy chief economist at CNPC’s planning department.

The country, which does not produce any commercial shale gas, hopes to triple its use of natural gas to meet 10% of energy demand by 2020, reducing its reliance on dirtier fossil fuels, such as coal and oil.

Together, the Sichuan and Tarim basins hold China’s estimated recoverable shale gas resources of 36 billion cm, 48% more than the US, according to the Energy Information Administration (EIA). Additionally, the EIA identifies five other prospective basins that are yet to be fully investigated.

But the country faces many hurdles before it can commercialise its resources, including legal and technological challenges, competition for land, water management issues, as well as issues relating to infrastructure, equipment and contractors.

A separate report in the China Securities Journal said the country was aiming for coal-bed methane output of between 21.5 billion cm and 23.5 billion cm by 2015. The journal cited a government plan set for public release by the National Development and Reform Commission in the near future. Further details were not immediately available.

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