China enters shale gas era with tender offer

China’s search for natural gas passed a milestone this week as Beijing launched its first tender offer for four shale gas blocks in southern China to underline its determination to move forward with developing unconventional gas resources.

China is the world’s largest energy consumer and Beijing is increasingly looking to natural gas to help power the country in coming decades. Shale gas, natural gas trapped in rock and extracted through a water-intensive process known as “fracking”, is believed to be abundant in China, although it is not yet being extracted there.

The tender offer, China’s first for shale gas, will not be open to foreign bids at this stage, a disappointment to foreign oil companies such as Shell and BP which have been circling China’s unconventional gas sector.

The six groups competing for the tender are PetroChina, Sinopec, Cnooc, Shaanxi Yanchang, China United Coalbed Methane Co, and Henan Provincial Coal Seam Gas Development Co, Dow Jones reported, citing a government official.

The US Energy Information Agency estimates that China has larger shale gas reserves than the US, where commercial shale gas extraction has transformed the energy landscape and dramatically lowered the price of natural gas.

China does not produce commercial shale gas because most oil companies are more focused on conventional natural gas, which is cheaper to produce than shale gas.

The expertise required to produce shale gas is also a barrier and Chinese companies have been seeking opportunities overseas to invest in shale gas projects so that they can acquire this knowhow. In the past year Cnooc, China’s largest offshore oil producer, has announced two multibillion­dollar deals with Chesapeake Energy of Oklahoma, a leading shale gas producer, to jointly develop several shale oilfields in the US.

Analysts said the tender offer – in which blocks will be won by auction – was an attempt to encourage competition between Chinese oil companies.

Laban Yu, head of oil and gas research at Jefferies, said: “China used to just parcel out resources by fiat, but this [tender] is moving in the US market direction where the government makes a tender offer for bids on drilling blocks”.

He warned, however, that the small number of eligible Chinese companies in the shale gas field could make it difficult for the tender process to work efficiently.

China will hold a second tender offer for shale gas blocks this year and could extend the invitation to more Chinese companies, including Sinochem and ZhenHua Oil, Dow Jones reported. Oil and gas exploration in China is partially open to foreign companies.

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