Out-Law News 2 min. read

Foreign joint ventures invited to bid for shale gas exploration licences in China

Foreign joint ventures (JVs) will be able to bid for the next round of shale gas exploration rights in China, the country's Ministry of Land and Resources (MLR) has announced.

In an announcement on the department's website, the MLR said that bidding for its second tender process in the rights would be open to "all [companies] registered in the People's Republic of China [with] registered capital of more than 300 million yuan, with oil and gas or gaseous mineral exploration qualification", according to an automated translation. Those companies would, it said, be able to "establish cooperative relations with Chinese-controlled foreign joint enterprises". The process covers 20 blocks across eight provinces with a total area of 20,0002 square kilometres, and tenders will be valid for a minimum of three years.

The MLR ran a smaller tender process for shale gas exploration licenses last year, according to the Financial Times, however bids were limited to domestic companies and government did not receive the anticipated response. China's reserves of the gas are estimated to be the largest in the world according to the US Energy Information Administration, at as much as 1,275 trillion cubic feet.

Energy law expert Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement presented good opportunities for both potential investors and the supply chain; however, he sounded a note of caution on the untested areas being presented by the Chinese government for exploration.

"The quality of the information made available by the Chinese government about seismic or prior drilling history will be important, as will access to infrastructure in the relevant region," he said. "Those in the supply chain should carry out their normal due diligence to ensure that they are comfortable with a new operating environment."

Shale gas, which is usually found trapped in shale rock, is extracted using a process called hydraulic fracturing or 'fracking'. This involves pumping water at high pressure into the rock to create narrow fractures, allowing gas contained there to flow our and be captured. The technology has proven controversial in the UK after studies found that it was responsible for minor earthquakes near a site in Blackpool last year, however in April a Government-commissioned report confirmed that the technology was safe providing companies took steps to limit the risk of earthquakes.

A recent report (136-page / 1.4MB PDF) by the House of Commons' Energy and Climate Change Committee on investment opportunities for UK companies in the Chinese energy market suggested that the UK shale gas was one areas open to UK businesses for investment due to the UK's "reputation as an innovative but responsible player" in the sector. However, it warned that extraction techniques came with "environmental risks" and suggested that the UK should "seek a dialogue on gas with the Chinese Government, looking at the ways in which the economic and environmental risks of exploitation can be handled".

In evidence given to the Committee, John MacArthur of Shell said that there was a "terrific opportunity" to develop the energy source in China although he added that he "could not comment" on what opportunities there were for UK-based companies as opposed to those in countries such as the US. However, the UK's indigenous oil and gas industry could be exploited to create jobs and build on UK technical skills around the world, he added.

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