Breaking New Ground

By+Wang+Jun

Shale gas， which has helped the United States realize energy independence， is likely to set off an “energy revolution” in China， a major energy consumer with one of the worlds largest reserves of shale gas.

The countrys Ministry of Land and Resources （MLR） announced that it will soon launch the third shale gas exploration tender at a press conference on September 17.

According to Peng Qiming， Director of the Department of Geological Exploration of the MLR， by the end of July 2014， China had granted 54 permits for prospecting shale gas， with a total investment of 20 billion yuan （$3.26 billion）. The MLR estimates that Chinas shale gas production will soon experience a period of massive growth， with its output reaching 6.5 billion cubic meters in 2015 and 15 billion cubic meters in 2017. By 2020， shale gas output in China may surpass 30 billion cubic meters and is expected to reach 40-60 billion cubic meters if properly explored， accounting for one fifth of the total natural gas output.

Uncharted terrain

China has regarded this clean and efficient natural gas as a new hope in guaranteeing the countrys energy security and readjusting its energy mix. During its 12th Five-Year Plan （2011-15） period， the government has issued several documents to support exploitation of shale gas and stimulate the development of the industry.

Although the current shale gas output is still relatively small， the MLRs ambitious plan shows its determination to accelerate the development of the shale gas industry.

The macroeconomics institute affiliated to 21st Century Business Herald believes it is urgent that the country improve its capabilities in terms of prospection and output forecast， which not only constitutes the foundation for resource assessment， but is also the basis for formulating medium- and long-term shale gas development plans and of resource management.

Highly risky， the prospection and exploitation of shale gas require highly sophisticated technologies， enormous inputs and a lot of time. China has only just recently commenced exploitation of shale gas， and it produced only 200 million cubic meters of the fossil fuel in 2013.

The institute affiliated to 21st Century Business Herald believes that because of differences between the two countries in terms of geological structures， technological capabilities， infrastructures and business patterns， the success of the U.S. model for shale gas exploitation will be hard to replicate in China.

Though it is widely accepted that China has huge reserves of shale gas， the specific magnitude of recoverable reserves has not as of yet been established， and institutions at home and abroad offer quite different figures， ranging from 10.3 trillion cubic meters to 12.6 trillion cubic meters.

At the press conference， Peng admitted that Chinas shale gas industry is still in its infancy.

Compared to the United States， Chinas shale gas reserves are located much deeper， making the cost of discovering and mapping them two to three times higher that in the United States， Gordon Kwan， Regional Head of Oil and Gas Research at Nomura told news website ThePaper.cn.

According to a report by Haitong Securities Co. Ltd.， the average cost of exploitation of shale gas in the United States is only about $0.11 per cubic meter， but in China where commercial exploitation has not yet commenced on a large scale， the exploitation cost is 1.24-2.68 yuan（$0.2-0.44） per cubic meter in the absence of government subsidies.

Moreover， in the United States， most of the areas abundant in shale gas are in the central plains， vast but sparsely populated， while in China by contrast， most of the areas with rich shale gas reserves are densely-populated， and some of the areas are even home to unstable geological structures， where exploitation of shale gas could potentially cause earthquakes and other geological disasters.

Safeguarding water resources also poses a challenge. As is the case in the development of other petrochemical energies， exploitation of shale gas cannot be carried out without water. According to an estimation by the MLR， to reach the goal of producing 60-100 billion cubic meters each year set by the Shale Gas Development Plan （2011-15）， it needs 380 million cubic meters of water， equal to the water consumption of a city with a population of 12.66 million for one year.

In the United States， the government failed to adopt effective environmental protection measures during the initial period after shale gas was exploited， causing environmental problems such as wastewater pollution. China must draw on such lessons to formulate a sound system of environmental protection laws and regulations， and monitor corporate activities in shale gas exploitation.

Diversifying financing sources

Shale gas exploitation is a highly capital-intensive industry， requiring huge preparatory investment and long investment cycles. Industrial insiders estimate that to realize the goal of producing 60 billion cubic meters of shale gas by 2020， an investment of at least 400 billion yuan （$65.24 billion） will be needed.

In the United States， a company usually raises funds through equity financing during the prospection stage. After the gas wells are put into operation， the company may raise funds for further development through bond financing or selling the gas wells to large shale gas companies. But in China， the financial market is not as mature as that in the United States， therefore the financial channels are not as effective.

To expand its financing channels， China may allow the participation of private investors.

In China， 80 percent of shale gas potentials and almost all the high-quality shale gas resources are situated in existing oil and gas-reserve regions. All these regions are currently being exploited by the four stateowned oil companies—China National Petroleum Corp. （CNPC）， Sinopec， China National Offshore Oil Corp. and Shaanxi Yanchang Petroleum （Group） Co. Ltd.

Moreover， prospection and exploitation of shale gas require investment on a scale which few private companies would be able to afford. During the first two rounds of shale gas tenders， only two private companies won the bids and are now permitted to enter the shale gas industry， but the fields they gained are areas with small reserves where exploitation is difficult.

Private companies attitudes to the newly announced third round of tender have been reserved. Deng Xuejun， Assistant to President of Honghua Group， told National Business Daily that companies focus on the input-output ratio and will take the quality of blocks offered by the tender into consideration. Blocks difficult to explore and with low potential output wont be accepted， he said. Even if a quality opportunity presents itself， they must still consider the costs—for example， the bidding price.

At a seminar held in Beijing on September 26， Zhang Dawei， Director of the Mineral Resources and Reserves Evaluation Center of the MLR， suggested the establishment of a“special zone” for shale gas in southwest Chinas Sichuan Province and nearby regions to break the monopoly of state-owned oil companies and allow entrance of private investors.

The massive commercial exploitation of shale gas in the United States benefits from the countrys sound network of pipelines. By 2013， the United States had 1.98 million km of natural gas pipelines， while China had only 48，500 km of pipelines.

Moreover， most of Chinas natural gas pipelines are again controlled by state-owned oil companies. For instance， CNPC alone has 41，000 km of pipelines. At present， the per-km construction costs of natural gas pipelines have increased to around 90 million yuan （$14.63 million）， which makes it unrealistic for private companies to build new pipelines relying solely on their own.

The institute affiliated to 21st Century Business Herald thinks that since most of Chinas shale gas resources are located in the central and western regions at a considerable distance from the target consumption markets， the government must offer solutions to the issue of transportation to shale gas companies. That requires breaking the current monopoly in terms of access to pipelines.