China shale gas bid hits hurdle

CHINA'S plans to unlock what could be the world's biggest shale gas reserves risk running further off track after 16 firms awarded exploration rights in the latest auction lacked one core skill - not one has drilled a gas well before.

Beijing is hoping shale gas can transform the country in the same way as the US boom, though to date there has been little commercial production and a target of producing 6.5 billion cu m of gas by 2015 in the world's biggest energy consumer looks out of reach, according to industry experts.

The lack of experience exploiting shale among new firms scrambling to enter the sector will make it an even bigger challenge to get at the gas, and if they fail to deliver China will struggle to reduce its dependence on expensive imports of oil, liquefied natural gas and coal.

The auction winners will have to buy in the expertise they lack, offering the prospect of lucrative contracts for specialist foreign firms such as Schlumberger or Halliburton for the "fracking" (hydraulic fracturing) technology to get at the gas.

The first shale auction two years ago was dominated by big Chinese state energy firms such as CNOOC Ltd and PetroChina.

The second auction attracted interest from more than 100 firms, an eclectic group that included a real-estate developer, a grain trader and a tobacco dealer, lured by gas subsidies and aided by easy access to funds.

The profile of the bidders reflected both the fever pitch over shale and its potential and the government's attempt to replicate the conditions that underpinned the US shale revolution: competition among a myriad of independent drillers.

"They will have received very little data about the blocks, will have very little idea about what it is going to cost them to do exploration wells and no idea about development costs," said Tony Regan of Tri-Zen Consultancy in Singapore, which advises gas companies doing business in China.

"They are driven by the attraction of getting in early into what could be a huge market," he said. Reuters