Strange Bidders in Chinese Shale Auction

As China's second shale-block auction proceeded, the leading bidders didn't reflect Chinese natural gas and oil companies at all. However, China's three largest energy companies—mainly China National Petroleum Corp.—own almost all of the nation's oil assets.

The Wall Street Journal reports:

"It isn't a surprise to see that [CNPC-controlled] PetroChina isn't a significant bidder, given that they hold so much acreage already, and the purpose of the licensing round is to encourage others," said Neil Beveridge, a Sanford Bernstein senior analyst.

Although Chinese companies have made investments in North American shale assets, development of shale resources within China itself has been anemic so far. For the most part, this is due to a lack of technological knowledge on part of Chinese oil and gas companies.

Shale gas output, presently negligible, would have to reach 6.5 billion cubic meters by 2015 and up to 100 billion cubic meters by 2020 in order to reach the Chinese government's optimistic goals.

The Chinese Ministry of Land and Resources stated on Thursday that it has offered 19 shale-gas blocks with a shortlist of 3 bidders per block. Oddly enough, the list includes such misfits as a company that makes candles and bathing products, a home appliances company, and so on. Of the three major national energy companies, just one—a PetroChina subsidiary—was on the shortlist.

This auction, unlike the first one back in June, was open to non-state bidders, but there were few non-state Chinese bidders this time around. 152 bids arrived from 83 companies.

According to the U.S. Energy Information Administration, China could have up to 1,275 trillion cubic feet of recoverable shale gas reserves in two basins. That exceeds the entire reserves of the U.S. and Canada put together.

But the severe lack of technical expertise, complex geology, and other factors make for significant difficulties in harvesting those reserves.