Shale gas development faces obstacles

BEIJING - Chinese authorities have been welcoming private and foreign firms to tap the country's vast shale gas deposits, but new entrants have felt impeded by obstacles.

The Ministry of Land and Resources (MLR) released the results of the second round of shale gas auction last Thursday. Two Chinese private firms, along with 14 state-owned enterprises, won the biddings.

The second round of bidding attracted 83 enterprises to vie for 20 reserve blocks. But the MLR offered minimal geological information for each block auctioned.

"Information sharing is very important for the oil and gas sector. The less data, the more risks, and the more prudent investors will be," an unnamed analyst with an international oil-services firm said in the December 3 edition of Caijing magazine.

The MLR said on November 22 that it encourages eligible private companies to explore and exploit the country's shale gas reserves, and foreign companies can also join in through Sino-foreign partnerships.

The Ministry of Finance has also promised to offer shale gas subsidies through 2015 to spur development of the resources.

But private and foreign firms have found it hard to reap the economic advantage of this nascent clean energy in China due to the lack of geological information on the reserve blocks and a legal vacuum that fails to address the rights of smaller investors.

Qiao Dewu, deputy chief engineer with the Strategic Research Center of Oil and Gas Resources under the MLR, said the ministry cannot and is "not obliged" to offer further details on the quality of each block.

The aim of the bidding, according to Qiao, is not to sell mining areas with fixed commercial value, but to attract investors to explore these untapped natural reserves.

Another reason that has kept private and foreign bidders hesitant about the auction is that authorities leveled the validity period of the exploration rights for all blocks to three years.

As China's reserves are often concentrated in mountainous or arid regions, it might take extra time and manpower to build roads and other infrastructure. This is obviously included in the three years.

However, from past experience of the pioneering state-owned oil companies, three years does not sound incomprehensible.

"Two or three years is enough to decide whether to continue with the work," a senior geologist with PetroChina said, adding that risk exploration is about accumulating information and making decisions in the course of exploring.

PetroChina, one of China's top oil and gas producer, has been working with Shell in southwest China since early this year and their first well successfully extracted shale gas in October.

For foreign oil firms eager to join China's game, Sino-foreign cooperation, especially that with big state-controlled companies, has long been a good solution to securing mineral rights.

China's Law of Mineral Resources stipulates that enterprises with exploration rights will be given privileged access to mining rights in the area they have explored, but private and foreign companies are usually daunted by lengthy administrative approval procedures.

"Wording like 'privileged access' does not suffice to protect the rights of the investors," said Zhang Libin, an energy consultant and partner at the Chinese law firm Broad and Bright.

The divorce of "obligatory" exploration rights from "profitable" mining rights has to be addressed via lawmaking before the sector becomes truly marketized, Zhang said.

China sets itself a goal of pumping 6.5 billion cubic meters of shale gas annually by 2015 and commercializing the production by the end of the decade. Authorities are working to fill the regulatory blanks as they fuel the development of the sector.

In November, the MLR also vowed to establish an exit mechanism to make sure that oil firms, who have shale gas reserves in their mining areas but fail to explore fully or at all, give away their exploration rights to other competitors.

This is good news for small and medium-sized companies who wish for a slice of the emerging business but are overshadowed by state-owned oil giants, although with limited resources and uneven playing field, they might find it harder to duplicate the success of their U.S. counterparts.