Shale gas boom takes time to spark

While the U.S. shale gas industry struggles with oversupply, China has decided to dig the unconventional natural gas harder, as the world's No.1 carbon emitter hopes to use the alternative fuel to reduce reliance on coal and improve energy efficiency.

The Ministry of Finance in China said Monday it will offer a subsidy of 0.4 yuan (6.3 cents) for every cubic meter of shale gas produced from 2012 to 2015. Additional subsidies can also be launched by local governments to meet their regional needs, according to the ministry.

On Tuesday, the announcement boosted stocks of companies unveiling shale gas plans, with Huayin Electric Power rising about 10 percent.

"The shale gas subsidy exceeded expectations," according to a note from investment bank China International Capital Corporation (CICC). The CICC report said the subsidy program demonstrated that the government wants shale gas to be commercially produced as soon as possible.

China is estimated to hold the world's biggest reserve of shale gas, which Moody's said in March is enough to support the country's current gas consumption for nearly 200 years and will make it more independent in energy supply.

The country plans to pump 6.5 billion cubic meters of the fuel annually by 2015 and commercialize the production by the end of the decade. However, analysts said the goal is too high to achieve. China has only conducted two rounds of auctions for shale gas exploitation blocks, with the latest held in October.

Investment research published by UBS on Tuesday estimated that China's shale gas business will be only lucrative enough for mass exploitation if the costs of extraction in the country's primary reserves can decline below 2.3 yuan per cubic meter. The process would take at least 5 to 10 years, according to the report.

The country needs to drill 20,000 shale gas wells by 2020, but so far it has only completed 63 wells, said Jiang Xinmin, a researcher with energy research institute at National Development and Reform Commission, China's primary economic regulator.

Analysts predict that even just to fulfill the goal of 6.5 billion cubic meters set for 2015, China needs to dig more than 100 shale gas wells annually in next three years.

According to the Ministry of Land and Resources, China owns 25.08 trillion cubic meters of shale gas in its exploitable reserves. In the U.S., shales gas output has quadrupled from 2007 to 2010 and plunged the price of natural gas to a 10-year low.

But China's reserves are buried twice deeper than American shale gas, and concentrated in mountainous or arid regions that present far more complex geological challenges, said Bao Shujing, a senior engineer with the petroleum research center at Sinopec, China's second largest energy company.

Shale gas extractors have to spend 40 to 80 million yuan on average to drill a single well in China. The costs in the U.S. range from 17 to 23 million yuan, Bao said.

The mass exploitation of shale gas is restrained by China's scarce water resources as well. Shale gas extraction usually requires 20,000 cubic meters of water to fracture each well, while many shale gas blocks are located in regions where water resource can barely meet local population's daily use, said Yang Kun, chief engineer with the oil and gas development company of China Huadian Corporation.

The lack of technological expertise also hinders China's ambition of putting shale gas into the market. Chinese extractors can operate drilling and fracturing by themselves, but still rely on foreign companies on some procedures like microearthquake monitoring, said Yang. The firm has the biggest installed capacity of natural-gas-powered electricity in China.

Though the production of the alternative fuel is still in its infancy, the Chinese government and enterprises are poised to accelerate the arrival of a shale gas boom that many believe will reshape the country's future energy supply.

Eight-three companies, of which one third are private firms, participated in the second auction last month, bidding for 20 shale gas blocks. But in the first round, only two blocks were involved and six state-owned companies invited.