Queue forms for a stake in China's vast shale gas reserves

The government aims to sign contracts with Chinese explorers this month to develop two blocks offered in the country's first auction, and a second sale is planned later this year, Zhang Dawei, the deputy director of oil and gas strategy research at the Ministry of Land and Resources, said.

China National Petroleum Corporation, PetroChina's parent, has agreed to form a venture with Royal Dutch Shell to improve its drilling efficiency after taking 11 months to complete the country's first shale well. Baker Hughes, the world's third-largest oilfield services provider, says it has helped US shale developers to cut drilling time to about 16 days a well.

"What they're doing now is trying to assess the reserves under ground and see how feasible it is to extract them," a global gas markets researcher at Cambridge Energy Research Associates, Adam Wang, said.

"I don't think China will be able to start producing shale gas [in substantial quantities] until after 2020."

Chinese shale may hold 1275 trillion cubic feet of gas, or 12 times the country's conventional natural gas deposits, the US Energy Information Administration said in April. China's "technically recoverable" reserves were almost 50 per cent more than those held by the US.

The two countries account for 32 per cent of the world's recoverable shale reserves of 6622 trillion cubic feet, according to EIA data.

Annual shale-gas output in China may reach 706 billion cubic feet by 2020, Pan Jiping, a researcher at the land ministry, said. That's less than 15 per cent of US production in 2010. China currently doesn't produce any shale gas.

Overseas explorers, barred from bidding in Chinese auctions of shale areas, are in discussions to forge local ventures. Chevron and BP are in talks with China Petrochemical, while Norway's Statoil is in negotiations to buy stakes in shale-gas assets in China. Shell is exploring the Jinqiu block in south-western Sichuan province with CNPC.

Chinese companies have invested in overseas ventures to gain access to technology for drilling horizontal wells in shale formations and to extract the fuel through hydraulic fracturing, which uses water, sand and chemicals to release the gas.

Cnooc agreed in February to buy a 33.3 per cent stake in Chesapeake Energy's Niobrara shale project in Colorado and Wyoming for $US570 million, after paying $US1.1 billion last year for one third of a Chesapeake shale venture in Texas.

China offered domestic explorers four areas last month in the country's first auction of shale blocks. Contracts will be signed for the Nanchuan and Xiushan blocks in south-west China, which each attracted at least three bidders.

With domestic shale gas production yet to start, Chinese energy companies are ramping up extraction of conventional deposits and contracting liquefied natural gas supplies from Australia to help meet the government's goal of doubling the use of gas to 8 per cent of energy demand by 2015.

The world's biggest energy consumer imported 11.4 billion cubic metres of gas in the first five months, nearly double that of a year earlier, the National Development and Reform Commission said last month. Domestic output rose 6.7 per cent to 43.2 billion cubic metres.

China Petrochemical agreed in April to buy LNG over two decades from a project planned by ConocoPhillips and Origin Energy. The state-owned parent of China Petroleum & Chemical also agreed to purchase a 15 per cent stake in the Australian venture for $1.5 billion.

China National Offshore Oil Corp agreed last year to buy LNG from BG Group's development in Queensland. PetroChina signed a 2009 pact with Exxon Mobil to buy the gas from the Gorgon venture.

Arrow Energy, acquired last year by PetroChina and Shell, is planning another LNG project on Queensland's central coast.