China Energy Watch: A few non state firms may be awarded shale gas blocks
BEIJING -- China's decision to allow non state companies to participate in a second government sponsored auction for shale gas blocks is a major step toward speeding up the development of the nation's shale gas industry, but the continuing dominance of domestic state owned oil majors all but guarantees its impact will be limited, according to industry analysts.
Shale gas exploration is a demanding task that requires high end technology and investment input, said Tian Miao, an energy analyst at North Square Blue Oak, a London based institutional broker. Only state owned companies like CNPC and Sinopec, have the appetite, and they're already taking the lead by partnering with foreign companies," she said.
Meanwhile, as much as 80% of China's recoverable shale gas reserves are already controlled by CNPC and Sinopec Group, said Li Yixuan, a natural gas analyst at Shandong based energy consultancy Chem99.
Even with the deck stacked against them, at least six non state Chinese companies, all of which are publicly traded, have announced that they will participate in the second shale gas block auction taking place in Beijing.
The auction, supervised by the Ministry of Land and Resources, or MLR, features 20 shale gas blocks located in eight Chinese provinces.
Among the six non state companies, only Guanghui Energy has experience in upstream oil and gas exploration and can bid without a partner because it already holds oil and gas exploration rights. The remaining five companies are involved in a variety of industries including textiles, real estate, retail fuel sales, coal production and engineering.
Guanghui is in the best position to be awarded a block, company officials and analysts have said.
"We have the same and advantages as state owned companies, and government backing, we have a better chance," said one company official, who declined to be named.
Earlier this year, the MLR said it would encourage private investment in China's unconventional energy sector by protecting the rights of private investors, including encouraging state owned oil and gas companies to contribute a corresponding amount of capital to private partners during the exploration phase of projects. It also urged state owned energy companies to seek private partners.
In June 2011, the ministry held its first ever auction for shale gas assets, offering four blocks to just six state owned companies. Ultimately only two blocks were awarded one to Sinopec and the other to Henan Provincial Coal Seam Gas Development & Utilization.
This time, more than 70 Chinese companies have indicated their interest in the second auction, one third of which are non state companies, the ministry said in July.
Although non state companies are now eligible to participate, their success might still be hindered by a lack of sufficient capital, analysts say.
The companies must have registered capital of $48 million as a way of proving they are large enough to develop the blocks.
"Whoever wins has only three years to prove they have the ability to exploit the assets, which will require investments of hundreds of millions of yuan," North Square's Ms. Tian said.
She added that non state companies may have a better chance of being awarded blocks if they team up with local government agencies or bureaus because of their access to cheap government backed credit.
The six non state companies already planning to bid have an average registered capital of $112.3 million and five of them are partnering with local governments or the local branches of state owned companies, company statements show.
However, Chem99's Ms. Li said "probably no more than 20% of the blocks will end up in private companies' hands."
China recently set a target of producing 6.5 Bcmpy of shale gas by 2015 from virtually zero this year and hopes to produce between 60 and 100 Bcmpy by 2020 a number that some analysts are skeptical about.
China might have 25.08 Tcm of "potentially recoverable shale-gas resources," the ministry has said. In comparison, the United States, which has experienced a shale gas boom over the past decade, has about 13.65 Tcm of "unproved technically recoverable resources," according to the United States Energy Information Administration.
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