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Next round of Chinese shale gas block options "delayed until spring", according to local press

Out-Law News | 21 Feb 2014 | 5:13 pm | 2 min. read

The next round of auctions for shale gas blocks in China has been delayed until the spring of 2014, to give the country's Ministry of Land and Resources (MLR) more time to work on reducing the risks and costs of exploration, according to local press reports.

The upcoming auction round is the country's third and was due to take place in December, although no announcement has yet been made by the MLR. Sinopec, the Chinese oil and gas company, said on its website that it now expected the auction to take place at the end of March or in early April, according to an automated translation. The blocks that will be up for auction will be located in Sichuan, Chongqing and Hubei.

Between them, Sinopec and the China National Petroleum Corporation (CNPC) hold the existing oil and gas rights to some of the most lucrative shale gas blocks. According to Sinopec, the MLR has indicated that it will discuss the possibility of including some of these blocks in the next auction with the companies, with the intention of raising the appeal of the upcoming auction.

According to the US Energy Information Agency, China has the largest known shale gas reserves in the world. The MLR has predicted that the country's shale gas output could reach 6.5 billion cubic metres per annum by 2015, increasing by more than tenfold to 100 billion cubic metres per annum by 2020. However, shale gas reserves in China tend to be deep underground, making them difficult to commercially extract.

"To solve this problem for the third round of bidding, the MLR will first invest in geological exploration wells and provide some investment and geological data about the tender blocks to ensure the progress of the tender after," Sinopec said on its website.

"Exploration costs for winners of the first two rounds of shale gas development blocks are too high, the risk is too great ... Due to the high cost, successful companies have to re-enact the development plan, the progress is below expectations," Sinopec said.

MLR released the first round of shale gas blocks for tender in 2011. However, this initial round was only open to six state-owned enterprises. A further 19 blocks were released for tender in September 2012, with bidding open to private enterprises and foreign joint ventures as well as state-owned enterprises.

Last year, the Chinese government announced a number of policies and incentives designed to "accelerate" the development of the country's shale gas industry. Proposals included a range of subsidies and tax incentives, based on the amount of shale gas produced by a development and how the gas produced is used. Local governments will also be able to set their own levels of subsidy.

In a recent briefing note on Chinese shale gas prospects, energy law expert John Yeap of Pinsent Masons, the law firm behind Out-Law.com, said that although these policies were an important part in the move towards the commercialisation of shale, the lack of a "single set of detailed rules to regulate shale gas activity" was a significant problem for investors.

"The lack of a comprehensive regulatory regime and the need to address other commercial and technical risks mean China is still some way from commercialising its shale gas potential," he said. "But we believe it is just a matter of time before we see a clearer and more robust regulatory environment for shale gas given the twin factors of China's huge potential for shale gas and the need to find cleaner alternatives to burning coal to power its economic growth."

Last week Xinhua, the state-owned Chinese news agency, reported that Sinopec had discovered a shale gas well in south west China, located at a depth of 4,417 metres and with maximum daily output of 105,000 cubic metres. The MLR told Xinhua that the discovery was the deepest found so far in the country, and that its exploration would mark a "technological breakthrough" in China's deep shale gas drilling.