Minimums set on China shale gas exploration

Winners in the second-round rights auctions face set investment amounts over three years

PUBLISHED : Wednesday, 07 November, 2012, 12:00am
UPDATED : Wednesday, 07 November, 2012, 3:36am


Winning bidders at auctions for the second round of shale gas development rights will be asked to surrender their rights if they fail to invest at least 30,000 yuan (HK$37,200) per square kilometre of exploration area annually, according to an official at the Ministry of Land and Resources.

The minimum investment commitment, three times that of conventional natural gas projects, is an effort to ensure companies are serious about investing in the nascent and risky shale gas sector, which has been thrown open to participation by firms other than state-owned oil and gas producers for the first time.

The results of the auction would be known this month, said Zhang Dawei, director of the Ministry of Land and Resources' mineral resources and reserves evaluation centre, on the sidelines of the Global Unconventional Gas conference.

"All the bid evaluation work has been completed, the results announcement may be made before or after the Communist Party congress [due to start on Thursday], but it will definitely be within this month," Zhang said.

Of the 83 firms that submitted bids, less than 20 per cent were pure oil and gas producers, with the rest coming from the coal, power, property and financial investment industries, he said.

In all, 154 bids were received for three-year exploration rights on 20 areas covering 20,002 square kilometres. This would mean the successful bidders must plough a combined total of at least 1.8 million yuan into exploration over three years.

The auction was open to domestic private firms and overseas firms for the first time, as long as they or their partners had the required credentials. Last year, rights to four exploration areas were awarded to two state energy firms.

Shale gas is natural gas trapped within sedimentary rocks that previously could not be extracted economically because of technical barriers.

Technological advancement in the United States saw shale gas contribute 23 per cent of its total gas output from almost nothing a decade ago. But it was made possible only after three decades of research in both the private and public sectors.

China is estimated by the US Energy Information Administration to have the world's largest shale gas resources.

But a more complex geology, greater underground depth of shale gas resource, higher population density, lack of private ownership rights to land and underground mineral resources, lack of entrepreneurship in the state-dominated oil and gas sector and water shortages made development of the gas more expensive and challenging.

Zhang noted that non-oil and gas energy firms had been active in the second round of bidding, while the oil and gas majors were more "sensible, low-key and cost-calculating" in their bids.

Bids were judged not only on the number of well-drilling commitments that were made, but also the credibility of the whole exploration programme that also included seismic data collection, he added.

Private enterprises, mostly lacking experience in oil and gas development, have teamed up with foreign energy firms, and are "particularly keen in bidding".