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Cover Stories Series 2014> Reform Initiatives Underway for 2015> Retrospect> Feature
UPDATED: October 13, 2014 NO. 42 OCTOBER 16, 2014
Breaking New Ground
China may have to negotiate tricky logistical terrain in order to exploit its abundant—yet largely untapped—shale gas resources
By Wang Jun

Moreover, in the United States, most of the areas abundant in shale gas are in the central plains, vast but sparsely populated, while in China by contrast, most of the areas with rich shale gas reserves are densely-populated, and some of the areas are even home to unstable geological structures, where exploitation of shale gas could potentially cause earthquakes and other geological disasters.

Safeguarding water resources also poses a challenge. As is the case in the development of other petrochemical energies, exploitation of shale gas cannot be carried out without water. According to an estimation by the MLR, to reach the goal of producing 60-100 billion cubic meters each year set by the Shale Gas Development Plan (2011-15), it needs 380 million cubic meters of water, equal to the water consumption of a city with a population of 12.66 million for one year.

In the United States, the government failed to adopt effective environmental protection measures during the initial period after shale gas was exploited, causing environmental problems such as wastewater pollution. China must draw on such lessons to formulate a sound system of environmental protection laws and regulations, and monitor corporate activities in shale gas exploitation.

Diversifying financing sources

Shale gas exploitation is a highly capital-intensive industry, requiring huge preparatory investment and long investment cycles. Industrial insiders estimate that to realize the goal of producing 60 billion cubic meters of shale gas by 2020, an investment of at least 400 billion yuan ($65.24 billion) will be needed.

In the United States, a company usually raises funds through equity financing during the prospection stage. After the gas wells are put into operation, the company may raise funds for further development through bond financing or selling the gas wells to large shale gas companies. But in China, the financial market is not as mature as that in the United States, therefore the financial channels are not as effective.

To expand its financing channels, China may allow the participation of private investors.

In China, 80 percent of shale gas potentials and almost all the high-quality shale gas resources are situated in existing oil and gas-reserve regions. All these regions are currently being exploited by the four state-owned oil companies—China National Petroleum Corp. (CNPC), Sinopec, China National Offshore Oil Corp. and Shaanxi Yanchang Petroleum (Group) Co. Ltd.

Moreover, prospection and exploitation of shale gas require investment on a scale which few private companies would be able to afford. During the first two rounds of shale gas tenders, only two private companies won the bids and are now permitted to enter the shale gas industry, but the fields they gained are areas with small reserves where exploitation is difficult.

Private companies' attitudes to the newly announced third round of tender have been reserved. Deng Xuejun, Assistant to President of Honghua Group, told National Business Daily that companies focus on the input-output ratio and will take the quality of blocks offered by the tender into consideration. Blocks difficult to explore and with low potential output won't be accepted, he said. Even if a quality opportunity presents itself, they must still consider the costs—for example, the bidding price.

At a seminar held in Beijing on September 26, Zhang Dawei, Director of the Mineral Resources and Reserves Evaluation Center of the MLR, suggested the establishment of a "special zone" for shale gas in southwest China's Sichuan Province and nearby regions to break the monopoly of state-owned oil companies and allow entrance of private investors.

The massive commercial exploitation of shale gas in the United States benefits from the country's sound network of pipelines. By 2013, the United States had 1.98 million km of natural gas pipelines, while China had only 48,500 km of pipelines.

Moreover, most of China's natural gas pipelines are again controlled by state-owned oil companies. For instance, CNPC alone has 41,000 km of pipelines. At present, the per-km construction costs of natural gas pipelines have increased to around 90 million yuan ($14.63 million), which makes it unrealistic for private companies to build new pipelines relying solely on their own.

The institute affiliated to 21st Century Business Herald thinks that since most of China's shale gas resources are located in the central and western regions at a considerable distance from the target consumption markets, the government must offer solutions to the issue of transportation to shale gas companies. That requires breaking the current monopoly in terms of access to pipelines.

Email us at: wangjun@bjreview.com

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