Shale Gas Exploration Allows for Foreigners’Participation

On March 1, the Ministry of National Land and Resources held a press conference to make the first review of the potential of the shale gas. In the conference an insider from the Ministry said that the 12th Five-Year Planning on Shale Gas had already been approved by the National Development and Reform Commission and would be issued soon.

It is known that leaping development in shale gas exploration is anticipated during the 12th Five-Year Plan(2011-2015). If the production capacity of shale gas reaches 100 billion cubic meters, the total investment amounts to 400-600 billion yuan.

The shale gas is expected to change the situation of gas and oil exploration in China and thus it is placed under the limelight. But meanwhile, the capital and technology still strangle the development of this industry.

New Policy Opens the Door

Yu Haifeng, deputy director of the Department of Geological Perambulation at the Ministry of National Land and Resources, said that if the production of shale gas could reach beyond 100 billion cubic meters by 2020, it will become an important pillar for China’s energy industry and change the gas and oil exploration situation in this country.

In order to realize this goal, the pattern of shale gas exploration will be different from the others. The Chinese government will encourage the other investors other than state-owned companies, including foreign investors, to invest in this field.

The shale gas exploration in the United States and relevant technological innovation are done by thousands of energetic private companies. Now, the policy unlatches the door for the foreign and private companies to take part in the shale gas exploration in China, which is very good for its development.

The East Sea Securities’ research report said that the growing presence of foreign and private capital in the shale gas exploration could accelerate the development of this field. Meanwhile, the clear separation of production and ownership may keep the shale gas from the slow development like the coal seam gas.

It is noteworthy that the gas and oil exploration and operation rights belong to the three state-owned companies(China National Petroleum Corporation, China Petroleum & Chemical Corporation and Chinese National Offshore Oil Corporation) and Yanchang Petroleum Corporation while other companies have no right to explore natural gas. The vague separation between production and ownership is the main reason for the slow development of China’s coal seam gas in the past 15 years.

In 2011, the State Council approved the shale gas the 172nd mining resource of China.

After gaining the position as an “independent” mining resource, the shale gas exploration is no longer restricted by the exclusivity of gas and oil exploration rights. Any companies with capital and gas exploration qualification can tender for the rights.

The report from East Sea Securities also stated that the “independence” of shale gas aims to break the monopolization and accelerate the development process.

Prof. Liu Yijun from the China Petroleum University said that the shale gas exploration in the future needed the participation and cooperation among state-owned, foreign and private companies. “It will take some time to learn it. After all, the shale gas exploration is a kind of job with high technological contents.”

Meanwhile, Prof. Liu pointed out that the well-established small companies of shale gas exploration in the United States are a result of years’experiences and practices. Therefore, he thought it necessary to introduction some cooperative pattern when recruiting the bidders to give the Chinese companies a chance to learn from their foreign peers.

In addition, it is unrealistic to hope that the private companies could play the leading in the next couple of years because many systematic innovations are needed. Now only the foreign capi- tal is introduced as well to aid in promoting the development by solving the problems like pipelines.

Private Companies Short of Money and Technologies

In the press conference, Prof. Liu also said that the only thresholds the government set in shale gas exploration are about the capital, technology and relevant qualification. Because some mining areas are very big, the enterprises should meet the minimum standard about the exploration requirement.

The policy encourages the smalland medium-sized and private companies to get into the exploration of shale gas, but there are a lot of problems.

“The private companies are far behind the three major state-owned oil companies in technologies and capital. These are the shortcomings of these private enterprises,” said Zhou Xiujie, a fellow of the energy field at China Investment Consulting.

Meanwhile, he pointed out that the foreign companies would not be given unrestricted freedom to develop in China’s energy industry. “The restriction always exists. Foreign companies’advantages lie in their advanced technologies while private companies are far more flexible.”

On June 27, 2011, the Ministry of National Land and Resources held the first open invitation of bidding, as the new attempt in the systematic innovation of oil and gas exploration in China.

It is known that four areas with shale gas in Guizhou and Chongqing were offered for the bid. The total area is 11 thousand square kilometers. Apart from the three major state-owned oil companies, Yanchang Oil Petroleum, China United Coalbed Methane Co., Ltd and Henan Coalbed Development& Utilization Co., Ltd.

Li Lingxuan, an analyst from consulting company SCI, said: “Though private companies joined in the bidding for the development of shale gas, none of them could win the bid alone. Their status quo in technologies and capital require them to work together.”

In the aforementioned bidding, no private companies were chosen due to the considerations of capital and so on. According to Yu Haifeng, the offer of exploration right of shale gas will be given through bidding.

The shale gas exploration is a big cake, posing both opportunities and challenges for private companies.

Prof. Dong Xiucheng from the Chine Petroleum University said that some areas for pilot projects could be established for the shale gas exploration. The monopolization of state-owned companies should be avoided while the abuse of exploration rights is not allowed. He suggested that the qualification management should be enhanced while opening the shale gas exploration, allowing the companies with real experiences and technologies to take part in this field.

Prevent Frenzy in Shale Gas

Though big and commercial shale gas exploration in China right now, the state-owned, foreign and private companies all covet his big market with great potentials.

Recently, China Huadian Corporation declared its plan to get engaged in shale gas exploration in Hunan. Many foreign and private companies also showed their interest in this field.

The international energy giants represented by Shell, BP, ConocoPhillips and Chevron, are all engaged in shale gas exploration in China. In addition, Xinjiang Guanghui, MI Energy and other private companies are preparing to get into this field as well.

“The past 50 years are the age of petroleum, but the future prefers shale gas and natural gas. That’s why the oil companies attach great importance to this field and wants to grab this opportunity,” Li Lingxuan said.

Li Lingxuan also pointed out that even the foreign companies need to go through the exploratory phase in the shale gas exploration. Presently most of them are only making pre-production research to review the feasibility of the exploration. That’s because the risk here is huge C once the money is invested but no gas is found, the loss will be quite huge and cannot be offset.

“Enterprises should not get frenzied and swarm into this field,” said Prof. Liu Yijun. The shale gas exploration is still in the initial phase when the research and review are the major tasks. There is still a long way before the massive commercial exploration and development.