China in quest for shale gas reserves

Written by The Financial Times | Updated: Jun 30 2011, 05:44am hrs
By Leslie Hook in Beijing

Chinas search for natural gas passed a landmark this week as the government launched its first tender offer for four shale gas blocks in southern China, underlining Beijings determination to move forward with developing unconventional gas resources.

China is the worlds largest energy consumer and Beijing is increasingly looking to natural gas to help power the country in coming decades.

Shale gas, natural gas trapped in rock and extracted through a water-intensive process known as fracking, is believed to be abundant in China, although it is not yet being extracted there.

The tender offer, Chinas first for shale gas, will not be open to foreign bids at this stage, a disappointment to foreign oil companies such as Shell and BP which have been circling Chinas unconventional gas sector.

The six groups competing for the tender are PetroChina, Sinopec, Cnooc, Shaanxi Yanchang, China United Coalbed Methane, and Henan Provincial Coal Seam Gas Development, Dow Jones reported, citing a government official.

The US Energy Information Agency estimates that China has larger shale gas reserves than the US, where commercial shale gas extraction has transformed the energy landscape and dramatically lowered the price of natural gas.

China does not produce commercial shale gas because most oil companies are more focused on conventional natural gas, which is cheaper to produce.

The expertise required to produce shale gas is also a barrier and Chinese companies have been seeking opportunities overseas to invest in shale gas projects so that they can acquire this knowhow.

In the past year Cnooc, Chinas largest offshore oil producer, has announced two multibillion-dollar deals with Chesapeake Energy of Oklahoma , a leading shale gas producer, to jointly develop several shale oilfields in the US.

Analysts said the tender offer - in which blocks will be won by auction - was an attempt to encourage competition between Chinese oil companies.

China used to just parcel out resources by fiat, but this [tender] is moving in the US market direction where the government makes a tender offer for bids on drilling blocks, said Laban Yu, head of oil and gas research at Jefferies.

He cautioned, however, that the small number of eligible Chinese companies in the shale gas field could make it difficult for the tender process to work efficiently. He noted that in the US there are often dozens of companies competing for tenders.

China will hold a second tender offer for shale gas blocks this year and might extend the invitation to more Chinese companies, Dow Jones reported.

Oil and gas exploration in China is partially open to foreign interests, although almost none have made large discoveries there.

The Financial Times Limited 2011