The US shale gas and oil revolution is a key reason behind the current oil price crisis that is now proving such a huge challenge for the North Sea.
In the UK, where shale gas exploration is in its infancy, the fracturing of wells (fracking) has become highly contentious and is now a general election issue.
But what of China? After all, based on current knowledge, the world’s most populous country also possesses the largest shale gas reserves. And there is production.
The Ministry of Land and Resources of the People’s Republic of China (the MLR) published a decision on November 3 last year, following the expiry of the exploration rights of the first of two shale gas bidding areas.
China Petrochemical Corporation (Sinopec) was fined $1.3million (8million yuan) and CBM Development & Utilization of Henan Province (CBMDU) was fined $976,000 (6million yuan).
Both were criticised for failing to exploit the required amount of shale gas in the three-year prior period commencing July 18, 2011, when for the first time the MLR sold the exploration rights of two shale gas areas by way of bidding.
These two shale gas areas are located in Chongqin and Guizhou province. At the same time, both companies, taken together, were required to relinquish approximately 1,600sq.km.
Sinopec and CBMDU were the only winners of the 2011 first round of shale gas exploration rights bidding.
This “punishment” from the MLR may encourage the winners of the second round bidding to ensure they exploit the required amount of shale gas and speed up their exploration activities.
It is a surprise that Sinopec, with its strength and abundance of resources, has allowed itself to fail to exploit the required amount of shale gas.
However, this may indicate the scale of the physical and economic challenges in the domestic shale gas exploration or alternatively that the fines and relinquishment were relatively small compared to the investment required to create upside.
Dong Xiucheng, the director of the Oil & Gas Industry Development Research Centre of the China University of Petroleum, says: “It is now necessary that there is an international convention that the insufficient exploration of mineral resources is punished”.
Previously this was not the case but now there is a view that national resources cannot and should not be wasted in this way and that the new bidding model in the shale gas area can solve this problem.
The view of Lin Boqiang, director of the Collaborative Innovation Centre for Energy Economics and Energy Policy, is that the 14million yuan in total fines and 1,600km relinquished area is still insufficient to drive the right investment behaviours if natural resources are to be maximised and not wasted.
Wang Xiaokun, an analyst with commodity consulting firm SCI International, said the MLR action indicates that shale gas exploitation in China is still in an early development phase, and that the cost of exploration is far too large for most gas companies.
But he also acknowledged very significant steps forward have been made in shale gas development, but that only Sinopec and China National Petroleum Corporation (CNPC) have the resources to make practical progress.
Huaying Shanxi Energy Investment Co, a subsidiary of Wintime Energy, was one of the winners of the second round of bidding. However, a recent company report clarified that progress has been slow. So it is clear that more investment in technology for the exploration and development of shale gas is needed.
In order to make this happen the strategy of fines, relinquishments and a subsidy policy is favoured and likely to intensify. Subsidy payments are likely to increase and be extended to 2020.
Clearly Sinopec has the resources and technology to invest more and, to date, the corporation has produced more than 1billion cu.m of shale gas in Chongqin; so there is production.
This gas has been supplied for both Chongqin industry and for private use and all gas produced has been sold.
As stated at the start of this month’s column, China is judged to have the largest shale gas reserves in the world and will definitely wish to invest in technology in order to realise the huge prize.
The interesting issue is to consider what the time frame might be and how this impacts on energy resources and their exploitation globally, not least in the North Sea.
Penelope Warne, chair, senior partner & head of energy at CMS Cameron McKenna
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