China has released its first five-year plan for the development of shale gas, setting ambitious production targets and emphasising the need for foreign co-operation and better technology in developing the sector.

The world’s biggest consumer of energy, China is estimated to have huge shale gas reserves but it is still unclear whether the country will be able to develop them on a commercial scale due to geological and technological challenges.

Shale gas is natural gas that is trapped inside shale rock and is extracted by using highly pressurised water mixed with chemicals to crack open the rock.

Its increased prominence has revolutionised the energy sector in the US and sent natural gas prices there to the lowest for a decade.

Chinese policymakers are seeking to replicate the success of shale gas in the US, and the blueprint released on Friday is the first official detailed statement about policies during the 2011-15 period.

It sets a goal of 6.5bn cubic meters of shale gas production by 2015, which is equivalent to 2-3 per cent of projected 2015 Chinese gas production, and more than 60bn cu m of shale gas production by 2020. While those numbers are small compared with the scale of US shale gas production, analysts say the 2020 target will be very difficult to attain given the nascent state of China’s shale gas industry.

China does not have any commercial production of shale gas, but exploratory drilling for shale has increased greatly in the past year.

The new blueprint emphasises the need for foreign co-operation to develop shale gas technologies, and companies including BP, ConocoPhillips, Chevron and Royal Dutch Shell are involved in shale gas exploration joint ventures in China.

The five-year plan also states that competition within the shale gas sector will be encouraged and market entry conditions will be clearly defined for companies wishing to work in shale gas; these companies will be also highly encouraged to work with foreign partners.

The plan also promised supportive financial policies and subsidies for shale gas, including price subsidies, preferential tax treatment and land subsidies.

However, analysts have pointed out that as long as China’s state-controlled prices for natural gas remain at their current levels, companies will not have an incentive to develop shale gas resources because they can make more money from oil.

“There is a lot of talk about shale, but not a lot of action by the government in terms of natural gas pricing reform,” said Gordon Kwan, an analyst at Mirae Asset Securities, adding that natural gas prices needed to rise in order to make shale profitable.

“I think there is too much expectation for shale gas. There is a long-term future for shale gas on China but not right now, right now the focus is still on conventional natural and LNG,” Mr Kwan added.

Additional reporting by Gwen Chen

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