China to Auction 6 Shale Gas Blocks within A Month

SHANGHAI (Dow Jones Newswires), Oct. 27, 2010

China plans to launch an auction of six shale gas blocks within a month, but bidding will be limited to four of the country's state-owned oil companies, a senior official at the Ministry of Land and Resources said Wednesday.

The move is significant as the International Energy Agency estimates China has reserves of 26 trillion cubic meters of shale gas, which it hasn't been able to access up to now.

Zhang Dawei, deputy chief of the ministry's Strategic Planning Center, said the auction will comprise three blocks in Guizhou province, one in Chongqing municipality, one in Shanxi province, and one along the border between Anhui and Zhejiang provinces.

The six blocks each cover 6,000 to 7,000 square kilometers, Zhang told a conference in Shanghai.

PetroChina, China Petroleum & Chemical, Cnooc, and Shaanxi Yanchang Petroleum Group will be allowed to bid, he said.

Of these, Cnooc and Shaanxi Yanchang can work with foreign partners if they win blocks in the auction, Zhang said.

Shale gas is trapped in relatively impermeable rock, and producers need to crack the tight rock formations using streams of water and chemicals.

Technical advances allowing the development of shale gas have transformed the U.S. energy sector in recent years, provoking a wave of merger and acquisition activity and sharply reducing reliance on gas imports.

Both China and India, which are heavily dependent on imported oil and gas, are hoping to replicate the success seen in the U.S. with their own shale gas reserves. Up to now, China has focused on inviting U.S. and European companies into its tightly controlled onshore gas acreage in order to gain technical know-how.

To kickstart the development of the industry, China plans to introduce subsidies of CNY0.23-CNY0.3 a cubic meter of shale gas, Zhang said. China is also likely to reduce import tariffs on key equipment.

Shale gas may account for 8%-12% of China's conventional natural gas output by 2020, Zhang said.

Copyright (c) 2010 Dow Jones & Company, Inc.