China shakeout in latest race for shale gas

Real estate and investment firms are bidding alongside energy companies for slots at the starting line as China readies for the second heat of a shale-gas race.
Altogether 75 applications for shale gas exploration and drilling rights have been submitted by “a variety of companies,” a Department of Geological Exploration staff member at the Ministry of Land Resources (MLR) told Caixin.
Local governments including Chongqing Municipality are involved, and some are pushing the legal limits by dodging MLR licensing procedures.
It’s no surprise that bidders include major, state-run energy companies such as China National Petroleum Corp. (CNPC) and Sinopec, which won shale-gas rights in MLR’s first, invitation-only tender in June 2010. And interest shown by real estate developer Zhongtian Urban Development Group is understandable, given the company’s manganese and coal mining businesses in Guizhou Province.
Moreover, privately-held Zhongtian had been interested in expanding into the shale-gas sector for at least four years, said the company’s board secretary Li Jun.
Unexpected applicants, though, have been provincial-government companies and private concerns such as energy, auto sales and real-estate conglomerate Xinjiang Guanghui Industry Investment Group Co. Ltd. Many have little or no experience in the energy sector.
The government says it wants energy companies to tap shale-gas reserves to boost the nation’s natural-gas supply, upgrade the energy sector’s structure, and reduce greenhouse emissions.
MLR, the National Development and Reform Commission (NDRC), Ministry of Finance and National Energy Administration have set for China an annual shale-gas production target of 6.5 billion cubic meters by 2015. The current output is zero.
MLR in March estimated China’s shale-gas reserves at more than 134 trillion cubic meters, and said about 25 trillion cubic meters is currently extractable.
MLR has yet to set a timetable for the second round, for which bids have been entertained since May 17. The number of companies submitting applications exceeded MLR expectations. The process, said a MLR source, is expected to help officials assess the market’s appetite for shale-gas business nationwide.
Encouraging for local governments and non-energy companies was the low entry threshold for the second round, even though major players CNPC, Sinopec, CNOOC and CBM also got into the game. Also encouraged to participate were companies in the geological research, energy equipment, energy services and real estate arenas.
Meanwhile, foreign companies have been waiting in the wings for possible business opportunities linked to Chinese companies that win shale rights but lack industry experience.
Gavin Thompson, director of Asia-Pacific natural-gas research at consultant Wood Mackenzie, said he recently met representatives from several foreign companies interested in developing the shale-gas business in China. He said a common first question was, “How do we get in?”
Most Chinese companies vying for MLR approval have no experience in energy exploration and development, Galvin said, but many would like to learn from experienced foreign companies. Government regulations, however, generally don’t let them enter into production-sharing contracts with overseas partners.
An executive at one private oil company that’s applied for a chance to participate in the second round said he thinks many Chinese companies would sign production-sharing contracts with foreign concerns if the foreigner shoulders all exploration risks. But the government has balked at the idea.
“We asked the NDRC and MLR about this issue,” the executive said. “Neither could tell us what we should do.”
Ministry of Commerce officials have sought MLR’s opinion on production-sharing contracts for shale gas as well, said an MLR source, but so far they’ve received no reply.
Exclusive rights
To date, the only domestic-foreign venture awarded shale gas extraction rights by the central government follows a production-sharing tie-up signed in March by CNPC and Royal Dutch Shell for the Fushun-Yongchuan block in Sichuan Province, said Zhang Dawei, deputy director at the MLR strategic oil and gas research center.
The special deal complements the exclusive rights to foreign cooperation in conventional oil and gas drilling ventures that the government announced in 1993 and awarded five years later to CNPC and Sinopec. Later, China National Offshore Oil Corp. (CNOOC) was given permission.
The government has likewise given exclusive access to foreign cooperation for coal bed methane projects to a pair of state-owned concerns, China CBM Co. Ltd. and Henan Provincial Coal Seam Gas Development and Utilization Co. Ltd.
Only six companies — CNPC, Sinopec, CNOOC, CBM, Henan Provincial and the Shaanxi Province government’s Shaanxi Yanchang Petroleum (Group) Co. Ltd. — were invited to the first shale gas bids for blocks in Beijing.
In search of shale gas, MLR this year asked CNPC, Sinopec and CBM to thoroughly explore mineral-resources blocks for which they already hold licenses, said Li Liang, director of CBM’s operations department.
Sinopec plans to extract 2 billion cubic meters of shale gas annually by 2015. Sources say CNPC’s target is slightly higher than Sinopec’s. And CBM’s plan calls for an output of 800 million cubic meters per year by 2015.
Li said the major energy companies have been granted oil and gas rights covering more than 80% of the all regions nationwide considered favorable for shale gas. Indeed, Caixin has learned that the major oil companies control most of the existing shale-gas blocks.
Zhang said blocks made available through the second tender, however, would not overlap previously licensed blocks. For this reason, blocks in shale-gas-rich Sichuan may be excluded from the second round. CNPC and Sinopec already control large numbers of oil and gas blocks in the province.
Thus, it appears MLR officials will make less than 20% of the nation’s shale-gas areas available for awarding to second-round bidders. These blocks would be in parts of Guizhou, Hunan, Anhui, Jiangsu and Shaanxi provinces where geologists have yet to begin testing to determine whether shale-gas drilling is economically feasible, an energy company chief geologist who asked not to be named told Caixin.
Go local
MLR said bidders for the second round had to be domestic companies with at least 300 million yuan in registered capital. Moreover, only independent entities, not consortiums, could apply.
Among those welcomed were companies that already hold oil or gas exploration licenses, and those with licenses through cooperative agreements with other companies.
These and other qualifications left a door open for local government-run companies, although some provincial and municipal governments have found themselves in awkward — and sometimes arguably illegal — positions as the shale-gas race gets under way.
Some local governments have been courted by private concerns seeking a foot in the door even though they have little or no energy sector experience. Their discussions with these companies in some cases have led to strategic alliances.
The Chongqing municipal government, for example, in June signed a 30 billion yuan ($4.71 billion) deal for shale gas drilling by forming a joint venture with a state-owned investment company called State Development and Investment Co.
Chongqing Mayor Huang Qifan said the municipality has large shale-gas reserves and its project would serve as a national pilot for resource extraction. The joint venture will take advantage of the local government’s ability to control land, build roads and tap water resources.
Some local governments have directly invited companies to shale-gas development projects, bypassing the MLR licensing process, a chief geologist at a private company bidding for shale gas rights told Caixin.
These include governments in southwest provinces and municipalities that control blocks not licenses to the major oil companies. Some of these blocks may be relatively small — only a few hundred square kilometers — but hold promise for sizeable reserves.
These local governments may be taking a risk, however, since the central government’s State Council has ruled that Beijing has ultimate authority over the nation’s shale gas.
Indeed, Zhang said it’s illegal for a local government to create its own shale gas blocks independent of the MLR tender process.
Any agreements signed by companies with local governments for shale gas blocks are “worthless pieces of paper,” said an industry source. “Local governments have no mineral rights.”
Source: Caixin Online