News Analysis: Oil shale: Game changer for China?

Tourists flock to the Changbai Mountain Range in northeast China during summer for refreshing weather and marvelous natural landscapes. But to oil developers, its beauty lies beneath the surface, in massive oil shale reserves.

Oil shale is a sedimentary rock that contains shale oil, considered a substitute for conventional crude oil. It can be refined into gasoline, kerosene, jet fuel and diesel fuel.

With China expected to consume 500 million tonnes of oil this year, up five percent from last year, the country's search for new energy sources is intense.

In 2011, the country produced just 204 million tonnes of crude oil, up only 0.3 percent from 2010, based on data from the National Bureau of Statistics.

"We imported 240 million tonnes of crude oil from foreign countries last year, equivalent to about 57 percent of our entire demand," said Ding Shubai, chief expert with the Beijing-based Research Institute of Petroleum Exploration Development. "This number is continuing to increase."

To reduce dependence on imports, new energy alternatives such as oil shale are becoming attractive.

China has about 240 billion tonnes of accessible oil shale reserves. About 10 million tonnes of oil can be produced from these reserves using a chemical process called retorting, according to figures from China's National Energy Administration (NEA).

Liu Tienan, head of NEA, said promoting China's oil shale industry is an important task, which will increase domestic oil supplies and ease the nation's energy strain.

In the United States, shale oil production in North Dakota, Texas and other states has become the "driver" of the country's oil production growth, Citibank research showed early this year.

Ding would like to see shale oil get a similar boost in China.

"The oil shale industry is essential to safeguarding China's energy security," Ding said.

Industry analyst Li Linghuan said China faces growing pressure from stubbornly high oil prices. However, the country has very little power to dictate international energy and fuel prices under the present system.

"A large-scale development of oil shale in the future would help balance the global oil price and offer China more opportunities to speak," Li said.

Due to oil shale's great potential, companies should put more effort into scientific exploration and strive for a breakthrough in its industrial production in the next few years, NEA's Liu said.

To meet this goal, the government has encouraged state-owned petrochemical giants to cooperate with foreign oil and gas companies to learn new exploration and drilling techniques.

PetroChina, the nation's industry leader, drew up its first shale oil evaluation and development plan with the Hess Corporation from the U.S. last Wednesday. The plan calls for further cooperation within their joint venture in west China's Turpan-Hami Basin.

Nevertheless, Ding said the industry is still in an early experimental stage and far from mass commercial application.

Others agree.

"At present, we can only buy advanced equipment from foreign companies, which keeps adding to our exploration costs," said a PetroChina senior executive who declined to be named.

Shale gas, a resource that involves a similar recovery process as shale oil, is a lot cheaper to recover than shale oil. Still, a shale gas well costs a domestic company about 15 million U.S. dollars, roughly twice as much as in the United States, according to the PetroChina executive.

Chinese exploration of shale oil reserves has also been slowed by difficulties finding and estimating reserves. Li said more research needs to be done in seismic work and core sample collection to improve the accuracy of geological exploration.

Environmental protection is also a concern, since recovering shale oil requires a large amount of water and land.

"The companies involved should also pay attention to waste disposal and air pollution issues," Ding said. "Shale oil will not be put on the market until techniques of environmental protection can function well at reasonable cost and within prescribed limits."

Experts are also calling for more policy initiatives, saying that China lacks the business regulations, tax preferences and subsidies that benefit shale oil developers in the United States.