China’s Second Shale Gas Auction Fails to Dazzle Amid Profitability Concerns

China’s Second Shale Gas Auction Fails to Dazzle Amid Profitability Concerns

By Tim Daiss

China’s breakthrough announcement last Spring that it had discovered massive amounts of shale gas deposits, allegedly surpassing that of US reserves, kept media buzzing in the US, abroad and particularly in China.

In March, China’s Ministry of Land and Resources disclosed that China had 25.08 trillion cubic meters (Tcm) or 886 trillion cubic feet (Tcf) of exploitable onshore shale-gas. The deposits, part of estimated 134.42 Tcm of potential resources gas in the country were discovered in 880,000 square kilometers (340,000 square miles) of exploration blocks that contain 15.96 Tcm of the fuel to be extracted.

In order to develop these resources, China held its second shale gas auction last month.

The China Daily reported that during the auction 83 companies made 152 bids for licenses to explore shale gas. The tender closed on October 25, the deadline for submitting bids.

The auction, which began on September 10, offered 20 shale gas blocks in eight different provinces. Nineteen of the 20 blocks received at least three bids, the minimum required for a block’s auction to precede. The block receiving only two bids was removed from the auction.

Winning bids will be announced after a group of experts evaluate the bidders’ exploration plans, capital budgets and support measures.

China’s first shale gas tender was held in June 2011 when six state-owned companies bid on four blocks in Chongqing municipality and Guizhou and Hunan provinces. Foreign companies were excluded from the first auction.

This time foreign companies were invited to participle in the auction in hopes that their technical expertise will help extract the deposits. Yet, foreign companies will not have carte blanche. They can only operate through joint ventures with domestic companies, with Chinese companies retaining administrative control.

According to bidding conditions, Chinese companies or Chinese held joint ventures with capital exceeding 300 million Yuan, just $48 million, may join the bidding. Each company that is approved can bid on two exploration blocks.

Before the second auction a few Western companies had already entered the industry. Shell signed the sector’s first production sharing agreement with China National Petroleum Corp. (CNPC) in March. ExxonMobil, BP, Chevron and French oil major Total have also embarked on shale gas partnerships in China.

Mixed reviews

Unlike the first auction last year, which was much smaller but heralded as a success and a paradigm shift in China’s energy future, China’s second shale gas auction garnered mixed reviews. Problems abound. For starters, shale gas development is expensive. Though 83 companies placed bids at the second tender, even more dropped out, expressing concern about high extraction costs of the hard to reach gas.

“The profitability of the projects is uncertain, and the lack of technical expertise poses another challenge,” said a spokesman for China’s Ministry of Land and Resources.

China, which to date has never produced shale gas commercially, also faces other shale gas development problems, including lack of a business model for the fledgling industry as well as the problem of water resource management. Fracking is water intensive and China is already facing severe water shortages.

Tough geological conditions pose another serious problem. China’s reserves are often buried two times deeper than American shale gas, and concentrated in mountainous or arid regions that present far more complex geological challenges, said Bao Shujing, a senior engineer with the petroleum research center at Sinopec.

Other hurdles persist. Chris Faulkner, Breitling Oil and Gas CEO, told Energy Tribune that lack of pipeline infrastructure in China must be addressed in order to deliver the extracted shale gas to market.

“So say we can drill 1000 wells by 2015 to meet the 6.5 billion cubic meters (Bcm) worth of natural gas production Beijing wants to produce from China. How do they plan to deliver this gas to the market and sell it? There is no way possible to achieve that,” said Faulkner, who just returned from China on November 8 where he took part in the Unconventional Gas Asia Summit in Beijing.

Faulkner said that another huge issue is government-controlled prices, which depress investment.

“Natural gas prices, which are controlled by the state, are kept at low levels that discourage investment in exploration because oil projects are much more lucrative at current prices.  This will be a major roadblock to shale gas considering a single well cost could reach $30 million in the early days,” Faulkner said.

Faulkner added that there is also a lack of knowledge, equipment and experience to perform deep horizontal drilling and fracking for shale gas in China.

Despite these barriers, a few days after the auction China Central Television (CCTV) put a positive spin on the situation, reporting that the auction had already ignited a storm of interest for shale gas companies in China’s capital markets, calling it a “bullish corner in a bearish market.”

Seemingly mindful of the financial challenges companies face entering China’s shale gas industry, Beijing announced on November 1 that it will offer state subsidies to shale gas companies in a move to encourage exploration and development.

Shale gas developers will be offered 0.4 Yuan ($0.06) for each cubic meter of shale gas developed between 2012 and 2015, the Ministry of Finance said on its website. The ministry said that the subsidy is aimed at increasing natural gas supply, adjusting the country’s energy structure and encouraging energy conservation and reduced carbon emissions.

However, environmental impact is not a concern for China’s energy industry, according to Faulkner.

“The plans of Beijing will not be superseded by any concerns of the environment. Just go take a drive through Beijing and enjoy the smog from black coal,” Faulkner added.

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