PUBLISHED : Monday, 22 November, 2010, 12:00am
UPDATED : Monday, 22 November, 2010, 12:00am

For all the excitement over renewables, some analysts believe shale gas and coal-bed methane, also known as unconventional gas, will play a bigger role in meeting the mainland's energy needs - at least in the medium term.

With resources of shale gas and coal-bed methane gases estimated to be five times larger than conventional gas, there is clear potential to increase production of unconventional gas.

David Hewitt, CLSA regional head of oil and gas, says the share of unconventional gas in total gas supply could rise higher than the 10 per cent expected by 2020. 'When you look at the volume of unconventional gas that China is believed to have, compared with security of supply and the cost of importing liquefied natural gas (LNG), it can be assumed that China will continue to accelerate the production of shale gas and coal-bed methane.'

Unconventional gas also produces fewer pollutants than many other forms of energy, but price is the key, Hewitt says.

China began increasing exploration in unconventional gas in 2005, when it could no longer import liquefied natural gas at the low rates it had secured earlier. Currently gas extracted in Jingjang, in Mongolia's Erdos basin, costs US$8.30 per thousand cubic feet (Mcf) and costs US$12.80 per Mcf when it arrives in Shanghai. This compares to the LNG price of about US$14.00 when it arrives at the port. A concerted effort to utilise the benefits of scale would be needed to reduce the cost of unconventional gases.

But companies involved in unconventional gas currently receive a combination of local and central government subsidy of about US$1 per unit to offset some of the development costs. Unconventional gas developers also enjoy exemption from taxes on imported equipment and tax holidays. 'The government is throwing a lot of incentives at the industry to make things happen,' says Hewitt. Beijing's policymakers will also have seen how the unconventional gas business has grown in the US, where it accounts for about half of the gas supply and is expected to increase to 70 per cent by 2020.

Taking the lead on the mainland, oil giant China Petrochemical Corporation (Sinopec Group) announced in May that coal-bed methane found in the north and shale gas from the southern regions would become an important growth engine.

Green Dragon Gas, the largest independent Chinese gas company, has also been pursuing new midstream and downstream opportunities to complement its growing coal-bed methane production on the mainland.

However, there are a number of challenges. Geological conditions can make tapping coal-bed methane more difficult. There is also the question of ownership of pipelines that transport gas, which is currently dominated by PetroChina.

'In the the five- to 10-year window, PetroChina will have the whip hand as it develops technology through its overseas shale and methane gas partners and acquisitions,' Hewitt says.

PetroChina could easily be a double winner: not only is it an upstream exploiter of unconventional gas, the company benefits from everyone else in the business because they will need to use the company's pipe network, Hewitt says.

So far, production sharing contracts have been awarded to small independent companies the same way as they have been in Australia and the US.

Hewitt says the companies' success in unconventional gas exploration will be driven by two primary factors.

First is the application of technology under the differing geographical conditions across the mainland. Then there is the cost of extraction compared to distribution for those companies without their own distribution network.

'PetroChina probably pays a small percentage above the lifting cost per Mcf unit to the exploration companies that makes the business just about viable,' says Hewitt.

But Green Dragon Gas, which has developed an integrated business that links facilities from upstream extraction to downstream production, could be an exception.