China: Shale Gas: What Is New In China?

Last Updated: 24 April 2012
Article by Jingzhou Tao and Gregory Louvel

The National Development and Reform Commission, China's Ministry of Finance, the Ministry of Land and Resources (MLR), and the National Agency of Energy on March 13, 2012 jointly published the first five-year plan for development of shale gas in China for 2011–2015.

Production targets are ambitious and emphasize the need for foreign cooperation, particularly in technology, to allow the growth of this economic sector.

China's resources are estimated at 134,420 billion cubic meters gas reserves, with an estimated 25,000 billion cubic meters of exploitable shale (for reference, U.S. reserves are estimated at 13,600 billion). China has one of the largest shale gas reserves in the world.

Overview of Shale Gas in China

Onshore deposits of shale gas are located all over the Chinese territory, and 180 areas of shale gas have now been identified by the MLR as priority development areas.

The study of shale gas in China began in 2004. In 2009, a number of blocks were designated as "priority development projects".

In May 2010, China conducted its first performance of hydraulic fracturing using U.S. technology and, in March 2011 a Sino-foreign joint venture started the first horizontal drilling of shale gas in the Sichuan Weiyuan block.

The exploitation of shale gas deposits is controlled by a handful of Chinese State-owned enterprises relatively inexperienced in this area. The central government is encouraging them to partner with international companies which have developed advanced technologies in this field and have extensive experience in developing shale gas reserves.

A first round of bidding for the commercial development of shale gas in China was launched by the MLR in June 2011. Six SOEs were invited to bid, but only two of the four blocks opened for tender received offers considered satisfactory and in the end only two SOEs were granted an operating license. Although foreign energy companies were not allowed to directly participate in this round of bidding, they were allowed to form joint ventures and provide technology services to Chinese companies involved in the exploration and production of shale gas.

Challenges for Foreign Companies

Foreign companies willing to be involved in the exploration and production of shale gas in China will face several major challenges. Investors will thus likely face high development costs and significant environmental and business challenges.

A Legal Vacuum to Fill

While the development of shale gas involves the setting up of an appropriate legal regime, no detailed rules have so far been enacted to regulate the licensing, exploration or production of shale gas.

However MLR announced on December 31, 2011, that China's State Council had approved changing the legal status of shale gas from a "natural resource" to an "independent mining resource". The consequence of such legal qualification is that shale gas is now exempted from the restrictive legal regime currently in effect for exploration and hydrocarbon production in China. Furthermore, the revised Foreign Investment Industry Guidance Catalogue (the "catalogue"), which took effect on January 30, 2012, specifies that foreign investments in the exploration and development of shale gas and shale liquids now fall in the "encouraged" category of the catalogue, which allows foreign investors to set up joint ventures with their Chinese partners and to enjoy certain administrative and tax benefits.

A Complex Geological Environment

The shale gas deposits in China are generally located in mountainous, rocky desert and are buried deep underground. The routing and installation of heavy equipment required for the operation of these deposits will be a complicated and expensive process.

A Strong Protection of IP is Essential

Chinese companies still lack the experience and technologies essential for the development of shale gas reserves. These companies rely very heavily on foreign technology, which is also not always able to solve the problems inherent in the local geology. A real effort in innovation will therefore be necessary to adapt foreign technology to local conditions, and a real policy of protection of intellectual property should be implemented by foreign companies.

Anticipate Water Supply Needs

The process of hydraulic fracturing requires large volumes of water. However, many shale gas fields in China are located precisely in areas facing serious problems of water shortages. The large-scale development of shale gas in these regions will need to take into account the availability of accessible water supplies.

Anticipate Environmental Impacts

Like most industrial operations, shale drilling has the potential to implicate environmental considerations. Issues deserving primary attention relate to water — both the use of chemically treated water to extract the gas and the disposal of waste water after extraction. Air quality issues also deserve attention, particularly during drilling operations. Modern drilling standards using advanced technologies, as well as careful oversight, can address these issues.

Upgrade of the Existing Infrastructure Network

Most shale gas reserves have to be connected to the existing network of pipelines. Although China has already increased the development of its pipeline network in recent years, the identification of new routes, the construction of new pipelines and their connection with the existing network will inevitably be a long-term process. Such bottlenecks, coupled with high development costs, could also slow the development of shale gas.

The Shape of Things to Come

The exploitation of shale gas fields in China is currently open to a limited number of Chinese SOEs. These companies are authorized to build partnerships with international companies (as minority shareholders). However, the MLR has announced that a larger number of investors will be invited to participate in the development of shale gas resources in China. Many large foreign oil companies are indeed willing to leverage their technology and know-how to gain access to the Chinese shale gas market and participate in the second round of bidding that should take place by the end of 2012 (20 blocks in 10 regions will be involved). Any firm with sufficient funding and an exploration license will be authorized to participate in the tendering process. However, the Chinese government has not indicated whether foreign energy companies will be allowed to participate directly in this second round, and if so, if foreign companies will be allowed to hold majority ownership and/or act as operators in the operation and development of shale gas blocks.

The Chinese government intends to replicate the coal bed methane legal regime for shale gas. This would imply a reduction or exemption of user charges for prospection, an exemption of customs duties for the import of some high-tech equipment needed for the exploration of blocks of shale gas, the implementation of a certain degree of liberalization in the price of natural gas, the fast-tracking of the approval process for land use rights qualification, etc.

The National Commission for Development and Reform Commission announced that the government target was to increase the production of shale gas to 6.5 billion cubic meters annually by 2015 and 100 billion cubic meters annually by 2020 (compared to a production of almost zero now), with an overarching goal of 26% growth in natural gas consumption in China by 2020.

Achieving these objectives will enable China to strengthen its energy independence and reduce its dependence on coal and imported crude oil and natural gas.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
King & Wood Mallesons
Clyde & Co
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
King & Wood Mallesons
Clyde & Co
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions