China Has Abundant Shale Gas, But North America Has the Expertise

China in January approved shale gas as an independent mining resource, a legal status that may allow more Chinese firms to develop the unconventional energy source.

Foreign companies would not be able to participate in the tenders but could partner with the winning Chinese firms.

The world’s top energy user could hold shale gas reserves around 1,275 tcf, according to the EIA, exceeding those of the United States (862 tcf). _FinancialPost

China is the world's largest energy consumer. While China is heavily dependent upon coal power plants and is working to build up its nuclear power plant infrastructure, developing its massive reserves of shale gas would be a huge economic and energy boon to China. Therefore, the Chinese government is beginning to change the rules dealing with shale gas.

Shale gas, or natural gas trapped inside deposits of shale rock, has been a game changer in the United States, where its commercial-scale production has reduced the country's dependence on imported gas and lowered its energy expenses. China, which sits on even bigger shale gas reserves but has yet to tap them, now also hopes to give that fuel a role in its energy mix.

To do so, Beijing on Dec. 31 approved shale gas to be an independent mining resource, a step that opens up its exploration to more participants. The sector previously belonged only to government-controlled companies, but now also welcomes Chinese private firms.

This policy shift will create competition and therefore boost China's shale gas development. It may also help China reduce its greenhouse gas emissions because burning gas produces about half as much as the coal China depends upon for its primary energy source.

Although foreign companies are still not allowed to participate independently, they can gain more partnership opportunities as more Chinese players enter this business and will need their expertise in extracting the fuel from hard-to-access deposits locked in shale rock.

Besides encouraging more companies to produce shale gas, there is also a new incentive for companies to produce more of it. The Chinese government last month began reforming its pricing mechanism in two pilot provinces, for the first time allowing the market to decide wholesale prices for unconventional gas, including shale.

Unlike the government-controlled pricing mechanism, which made producing shale gas unprofitable, this new scheme will raise prices energy companies can charge for their output in China's fast-growing natural gas market, with annual consumption set to triple during the next decade. _eenews

As shale gas production continues to gear up across North America, and begins to pick up in China and other energy import markets, the impact of this huge new energy bonanza cannot be easily over-stated.

China's markets will require significant liberalisation in order to make best use of resources. Such market liberalisation is apt to be applied in very uneven fashion, due to the age-old Chinese fear of disorder and collapse of authority.