China Revises Policy and Pricing to Boost Shale Gas Production

China natural gasSHANGHAI — China started 2012 with a policy revision and pricing reform on shale gas, as part of an effort to lure more companies into finding and developing this unconventional energy source.

Shale gas, or natural gas trapped inside deposits of shale rock, has been a game changer in the United States, where its commercial-scale production has reduced the country’s dependence on imported gas and lowered its energy expenses. China, which sits on even bigger shale gas reserves but has yet to tap them, now also hopes to give that fuel a role in its energy mix.

To do so, Beijing on Dec. 31 approved shale gas to be an independent mining resource, a step that opens up its exploration to more participants. The sector previously belonged only to government-controlled companies, but now also welcomes Chinese private firms.

This policy shift will create competition and therefore boost China’s shale gas development. It may also help China reduce its greenhouse gas emissions because burning gas produces about half as much as the coal China depends upon for its primary energy source.

Although foreign companies are still not allowed to participate independently, they can gain more partnership opportunities as more Chinese players enter this business and will need their expertise in extracting the fuel from hard-to-access deposits locked in shale rock.

Besides encouraging more companies to produce shale gas, there is also a new incentive for companies to produce more of it. The Chinese government last month began reforming its pricing mechanism in two pilot provinces, for the first time allowing the market to decide wholesale prices for unconventional gas, including shale.

Unlike the government-controlled pricing mechanism, which made producing shale gas unprofitable, this new scheme will raise prices energy companies can charge for their output in China’s fast-growing natural gas market, with annual consumption set to triple during the next decade.

Demand for gas soars, but shale development will take years

With all those efforts, Chinese media has reported, the nation aims to produce 6.5 billion cubic meters of shale gas by 2015, and 80 billion cubic meters by 2020.

That’s an ambitious target. Although the U.S. Energy Information Administration estimates that China by far has the world’s largest technically recoverable shale gas resources, followed by the United States and Argentina, it does not yet have any shale gas wells producing commercially.

What stands between the Chinese and shale gas mass production, according to Zhang Jinchuan, a shale gas expert at China University of Geosciences, is lack of technical know-how. Shale gas is produced by injecting highly pressurized water, solids and chemicals into wells to crack open rock, a process that Chinese gas producers have little experience with.

But companies here are determined to change that, through an overseas shale gas buying spree. As MIE Holdings Corp., a Chinese oil and gas producer that recently invested in a shale gas project located in Colorado, puts it, “the purchasing allows the company to gain key technologies in shale gas drilling, and the Chinese market will need such technologies.”

Earlier this month, Sinopec, a Chinese energy giant, made headlines by pouring billions of dollars into five Devon Energy shale projects in the United States. And Cnooc, China’s largest offshore oil and gas producer, signed multibillion-dollar deals in the past two years with the United States’ most active natural gas driller, Chesapeake Energy, to invest in shale blocks in Wyoming, Colorado and Texas.

The race for the know-how is on, but commercial-scale production is still a ways off. Zhang said that Chinese companies will still need time to digest technologies they learned from abroad and figure out how to apply their knowledge in China.

“With the current development speed,” Zhang predicted, “it will still take years for China to have sufficient command of the technologies that are needed for mass-producing shale gas.”

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