'Euphoria' about China's gas potential masks cool reception to shale auction

BEIJING -- China's latest push to open itself up to more natural gas exploration entered a new stage when 83 companies made 152 bids last month for the rights to search for gas in previously unexplored shale blocks.

The result turned up a surprising hodgepodge of bidders, according to a source with knowledge of some of the companies participating in the process, from the usual state-owned enterprises to Chinese municipalities hoping to access the energy bounty beneath their feet. Besides coal and oil companies, the bidders "range from real estate to grain merchants to tobacco traders," said Gavin Thompson, a Beijing-based consultant with the research and consulting firm Wood Mackenzie.

Part of the cause of the rush into China's remote shale gas fields is a sense of "euphoria" about the potential for cracking the geological riddles that have made an energy revolution in China a bigger challenge than in the shale formations of North America, Thompson said. "Everyone wants to be involved in it."

This is the first time China's government has opened the bidding process to private domestic companies. It's also the first time China is allowing foreign companies to participate in the bidding through a minority stake in a Chinese company. Still, Western oil and gas producers are saying little about their interest in China's latest shale gas auction, and they appear to be holding back. The shale blocks China has on offer for development are in hard-to-get gas deposits, according to sources, and there is still too much to be learned about the process.

A spokesman for Royal Dutch Shell had no comment on the latest round, but the Anglo-Dutch energy giant has a foothold through partnerships in other China gas projects. A ConocoPhillips executive told reporters earlier this fall that the company is "considering" getting into China's shale gas business but declined to say much beyond that.


The Chinese also don't seem to expect a lot of foreign enthusiasm at this stage, as the government decides which chunks of gas-rich regions in central and northern provinces should be opened to outsiders. Zhang Dawei, director of the Oil and Gas Reserve Assessment Center with the Ministry of Land and Resources, said at an energy conference in Beijing this month that foreign companies are "waiting for the determination of regions of blocks" before they actively pursue the right to explore alongside a Chinese company.

With such a range of Chinese companies bidding for shale gas blocks, Thompson said, it could take some time for foreign companies to get to know their new partners. Other questions include who might be willing to jump in with technical expertise and capital. "In my opinion, foreign companies would only be likely to enter after the bids have been announced," he said. "You'd have a better idea of who you're partnering with, more time to agree with all the terms."

A mysterious process

The government's bid tender requires that companies sign a three-year contract and award work within six months of being given exploration rights.

Other potential hurdles for the bidding companies include pricing gas and exploration costs correctly and meeting commitments to drill. "No one's really talked about it, and that doesn't surprise me," Thompson said. "For a lot of companies, they don't yet know the licensing terms" or what a future China might require. Speaking at the conference in Beijing, he added, "A lot of companies are scratching their heads at the amount of capital they would have to risk."

China is going to have a "tough time extracting and selling this gas at a reasonable cost, given the barriers to market, the lack of expertise of many of these firms and the remote locations of many of the blocks," said Nate Taplin, an energy analyst with the research firm GK Dragonomics.

At this point, it seems China faces hurdles to meeting a shale gas goal of 6.5 billion cubic meters a year by 2015. The U.S. Energy Information Administration estimates China has 1,275 trillion cubic feet of recoverable shale gas reserves, topping the United States. To see it, however, China appears to be moving toward subsidies to spur production and consumption, including ones to boost the market for cars that run on natural gas.

Keith Schneider, a Michigan-based journalist who writes for an environmental media project called Circle of Blue and has traveled throughout China in the past year, agrees that China has "tremendous impediments" in its shale gas hunt. "It's not at all clear that their reserves of shale are the same quality, as dense, as hydrocarbon rich and as uniform as in the United States," he said.

The 20 blocks offered in the second round of bidding are in Guizhou, Hunan, Anhui, Jiangsu and Shaanxi provinces, more remote regions that might turn out to be less economically feasible to access. Zhang Jinchuan, a professor at the China University of Geosciences, Beijing, told the gas summit that conditions in China's shale gas fields are "more harsh" and emphasized that the potential for tapping the gas in China's deep shale reservoirs is "very different" from the shale gas boom that's transforming the U.S. energy picture.

China limited its first round of bidding for shale gas exploration rights in 2011 to six companies, including the big state-owned oil companies China National Petroleum Corp. (CNPC), Sinopec and China National Offshore Oil Corp. (CNOOC).

So who's on the list this time? CNPC, Sinopec and CNOOC appear to be on that list, according to recent accounts, along with the city of Chongqing, the Zhongtian Urban Development Group and the Xinjiang Guanghui Industry Investment Group, both real estate groups. The Shaanxi Yanchang Petroleum Group, connected to the Shaanxi provincial government, and the Beijing Sanjili Co., which is part of the State Development and Investment Corp., are also bidders, according to sources.

"I've heard from various people that the government has a fairly sophisticated screening methodology for awarding contracts," Thompson said. "I don't think it will be necessarily that quick." The other question, he said, is whether there will be a third round of bidding for shale blocks with greater development potential.

That might be the round that brings in more overt foreign interest. Zhang of the Ministry of Land and Resources wrapped up a speech at the gas conference by saying, "Foreign cooperation is critical in China."

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