China Shale Gas Subsidies Set to Exceed CBM Incentives

China's finance ministry is drafting state subsidies for shale gas that will likely be much higher than those for coalbed methane (CBM), ranging from RMB 0.26 ($0.04) to RMB 0.3 ($0.05) for every cubic meter (cm) produced, a source close to the Ministry of Land and Resources (MLR) told Interfax on Wednesday.

The Ministry of Finance may release the subsidy policy for shale gas in the second half of this year, said the source at the China Unconventional Gas Congress in Beijing. The ministry granted CBM companies a production subsidy of RMB 0.2/cm ($0.03) in 2008.

The Chinese government is studying policy incentives in order to spur development of its vast shale gas reserves, which MLR estimates place at 25.08 trillion cubic meters. China is producing insignificant volumes of shale gas at present, but the government has set ambitious targets of 6.5 billion cubic meters per year (bcm/y) by 2015 and 60-100 bcm/y by 2020.

"Whether RMB 0.26-0.30 is sufficient is hard to say," said Michael Jones, Business Development Director at London-based Fortune Oil plc, noting that "investment costs are a lot higher for shale than for CBM".

"With some of the numbers projecting what the cost of production could be for shale [in China], it doesn't look sufficient to me at the moment. But it is very early days, and I think commercial volumes of shale are a long way off," Jones told Interfax on Thursday.

Experts at the congress also questioned the effectiveness of subsidies for encouraging shale gas development. Subsidies are not a useful economic incentive as they may divert companies' attention away from exploration and production, said a MLR official.

China's CBM subsidy has failed to stimulate investment in the sector and its implementation from block to block has been patchy, one analyst said.

"In our view deregulation of prices would be an even better way of stimulating shale gas development," Neil Beveridge, a Hong Kong-based analyst at Bernstein Research, wrote in a research paper in March.

"I think what needs to be in place are processes and support which eases the commercialization phase; from exploration through to development. There needs to be support from key agencies to help streamline that process," said Jones.

The National Development and Reform Commission (NDRC), which regulates and supervises China's oil and gas industry, is likely to let shale gas pricing be market-based, a source with the commission told Interfax on Wednesday.

The NDRC source said he expects the MLR to tender at least 10 blocks in the second shale gas auction and a total of 25 blocks in eight provinces to be made available for bidding this year.

Chinese companies have drilled 63 shale gas wells as of end-May, 27 of which have obtained industrial flows, according to Wu Yugen, deputy director of the MLR's Oil and Gas Strategic Research Center.

China National Petroleum Corp. (CNPC), the country's leading gas producer, has output between six and seven million cubic meters (MMcm) of shale gas in total from three wells in the Sichuan Basin so far, Tang Tingchuan, CNPC's director of development strategy, told delegates on the sidelines of the congress.

China Petrochemical Corp. (Sinopec Group) plans to drill six wells this year at its Fuling shale gas project, which is expected to produce 500 MMcm annually by 2015, Bao Shujing, senior engineer at Sinopec Group's Research Institute of Petroleum Exploration & Development, told Interfax.

Fuling in northern Chongqing Municipality is Sinopec Group's first shale production demonstration project.