Paper: China Plans 3rd Shale Gas Auction
Comment of the Day

November 08 2013

Commentary by David Fuller

Paper: China Plans 3rd Shale Gas Auction

Here is a middle section from this additional report from Reuters
The blocks to be auctioned will be located mainly in the southwest city of Chongqing as well as in the provinces of Sichuan and Hubei, the paper said, citing an industry source close to the Ministry of Land and Resources.

Compared with the second round of the auction, all the major Chinese state firms will participate, implying there is more confidence in the potential of the shale gas blocks. However, there is no interest yet from private companies, the paper said.

Results of the auction will be announced as early as January next year, the paper said, adding that resource rich blocks in the Erdos Plateau in Inner Mongolia may also be included in the sale.

Stymied by the cost of drilling and complexity of tapping shale gas, China has struggled in its bid to revolutionize its energy supplies and unlock what may be the world's largest shale gas reserves by emulating the frenetic exploration and production of the U.S. shale boom.

But Chinese oil giant Sinopec is for the first time pumping shale gas from test wells in commercial quantities in what it hopes will be a breakthrough in the development of a badly needed new energy source.

David Fuller's view There are two important reasons why China has yet to develop its extensive shale oil and gas resources.

1) Many within China's ruling Communist Party have substantial positions in the largely state controlled coal industry. Consequently, they do not want their revenue diminished by competition from the shale oil and gas industry. This also explains why China has been so ineffectual, to date, in reducing its chronic air pollution problem within the nation's larger cities. It is caused mainly by the burning of coal.

2) Modern China has progressed rapidly by copying technologies, a process that is considerably faster and far less expensive than inventing them. This is easy to do when overseas manufacturers are banging on China's doors, hoping to produce and sell in the world's second largest economy which also has the fastest growing middleclass consumer population. China did buy in some fracking technology, but it is hard to keep up with this rapidly developing industry which is dominated by the USA. The problem is complicated by the considerable geological differences between shale formations, which require drillers to adapt and modify their extraction methodologies.

China will get there eventually, but not quickly enough to reduce immediately the nation's current health problems caused by chronic air pollution. Furthermore, China is by far the world's biggest importer of crude oil. If it could produce considerably more from its own shale reserves, which are enormous, this would boost global GDP growth by lowering the global price of crude oil.

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