China moves forward with shale gas by holding second auction

China plans to realize climate and energy security benefits from increased use of domestic natural gas. The 12th Five Year Plan set a target for natural gas to account for 8.3 percent of total primary energy consumption by 2015, up from 3.8 percent in 2008.1 In addition, the National Energy Administration plans to begin developing shale gas resources, aiming to produce 6.5 billion cubic meters (bcm) annually by 2015 and 80 bcm by 2020.2, 3

On Dec 6, 2012, the Ministry of Land and Resources of the People’s Republic of China (MLR) published a list of winners of the second auction for shale gas exploration rights. For each block auctioned three potential winners were given, listed in order of priority for exploration rights for that block.

The winners of this second auction were diverse, with 16 different companies given the first place priority for the 19 shale gas blocks. The majority of the winners are best described as coal-based generators or mining companies. None of China’s four main oil and gas companies (CNPC, Sinopec, CNOOC and Shaanxi Yanchang Petroleum) claimed a first-place in this auction.

Of the 83 companies that were involved in this auction, about a third of them were from the private sector. Two private firms, Huaying Shanxi Energy, a subsidiary of Wintime Energy, and Beijing Taitantongyuan Natrual-gas won the Guizhou Fenggang II and Guizhou Fenggang III blocks, respectively. Although it is noteworthy that that private companies now have—for the first time—the opportunity to explore shale gas resources, the fraction is still low.

Many of the provincially owned companies secured blocks in their own provinces. For example, Henan Yukuang geological exploration investment company, a subsidiary of the Bureau of Henan geological exploration and mineral development, won both of the two blocks in Henan with a total exploration area of 2773.9 km2. Hubei Huadian, a company that focuses on producing heat, electricity, and developing clean energy, won the two blocks in Hubei with a total area of 2675.94 km2.

The only inclusion of China’s oil and gas companies on MLR’s list of winners was a subsidiary of PetroChina in third place for a block in Hunan. This result is perhaps unsurprising because on November 22, the MLR announced its intent to give the concession right priority for shale gas to the existing oil and gas owners. The lack of activity in this auction by the national companies could be driven by a number of factors. Given the recent MLR announcement, winning the auction for exploration rights may be redundant to the national companies already existing rights on a block. It is also possible that the national companies were uninterested in this auction because there is greater uncertainty in the shale gas resource in these blocks relative those they already own. It is worth noting that the first auction (held in June 2012) was open only to the state owned enterprises.

As described in this testimony, the shale gas industry in China is still in early development. Although the resource is likely the largest in the world, there are a number of challenges to China’s development of a fully integrated shale gas industry. For example, shale gas extraction requires large amounts of water, and most major shale plays in China underlie water-scarce regions. It is also uncertain where in the energy sector China’s shale gas will be used and what infrastructure is needed to enable its transportation and use. Because the shales in China are unique to the local geology, it is also expected that the techniques used in the U.S. for fracking may need additional innovations to unlock China’s shale gas. Despite these challenges, the fact that the blocks have been auctioned is a step forward for China’s emergent shale gas industry. These companies now have an opportunity to move forward with exploration and to find ways to overcome the challenges.

1. International Energy Agency. 2011. World Energy Outlook Special Report: The Golden Age of Gas.

2. Reuters. 2011. China sets ambitious shale gas output targets-paper. Available at http://af.reuters.com/article/energyOilNews/idAFL3E7LC0DM20111012 (accessed May 2012).

3. Bloomberg. 2011. China to Set Shale-Gas Output Targets, Securities Journal Says. Available at http://www.bloomberg.com/news/2011-10-11/china-to-set-shale-gas-output-targets-securities-journal-says.html (accessed May 2012).

Xu Liu is a Master’s degree candidate at the Yale School of Forestry & Environmental Studies and formerly an intern with WRI’s Climate and Energy Program.

Image is a work of a Bureau of Land Management employee, taken or made during the course of an employee’s official duties. As a work of the U.S. federal government, the image is in the public domain. Accessed via Wikimedia Commons