China will postpone its second tender of shale gas exploration rights until September, Zhang Dawei, deputy director of the Ministry of Land and Resources’ (MLR’s) Oil and Gas Strategic Research Centre, confirmed to Interfax on Wednesday.
The MLR has delayed the process repeatedly since last year without providing an explanation for the postponements. Zhang did not comment on the reasons for the delay on Wednesday.
However, Interfax understands that difficulties drafting qualification criteria and tension between local and central governments have contributed to the delay.
Pan Jiping, a senior MLR researcher, told Interfax in March that the ministry had been refining the auction’s entry requirements to ensure they did not hamper private sector participation by being overly strict. Conversely, the ministry sought to avoid the entry of unqualified bidders by being too lax.
The MLR has been scrutinising bidders to ensure they have the means to invest in shale gas exploration, Zhang said. Officials are anxious to avoid the problems experienced in the country’s CBM industry, where a number of undercapitalised and inexperienced players struggled to commercialise China’s large resource base.
The auction was also postponed to give local governments sufficient time to establish their own energy investment vehicles with which to participate, a foreign oil company representative previously told Interfax. Unspecified disagreements between shale gas-rich regions and Beijing have also contributed to delays.
“I don’t think this delay bodes well for China’s shale industry,” Chris Faulkner, chief executive of Breitling Oil and Gas, an American unconventionals player which is currently shooting seismic on some of China’s shales, told Interfax.
“These are prized possessions for the Chinese, and they’re cautious about relinquishing control. However, they’re going to have to come to the realisation that they will not meet their targets if they continue like this,” Faulkner added.
Still, taking the time to learn from and avoid the “CBM failures” experienced in the past is wise, an industry source told Interfax. “Finding the right incentive is key to enabling the rational development of the industry. Engaging with a wide range of stakeholders including foreign companies would be critical for learning and helping to set up the right regulation and management system,” said the source, who asked not to be named.
Zhang originally provided a timetable for the second auction in September last year, when he told delegates at an industry forum that the tender would be held in the fourth quarter of 2011.
Last October, he reiterated that the auction was likely to be held in the fourth quarter of 2011. Since then, state media and industry insiders have reported that the auction would take place in January, June, and August this year. The auction, however, did not happen.
There was some progress in May when the MLR opened registration for the second auction to domestic private and state-owned companies (see China opens registration for second shale gas auction, 17 May 2012).
Firms with registered capital of at least RMB 300 million ($47.45 million) and qualified in oil, gas or mineral exploration were eligible to register, the MLR said at the time.
Roughly 70 domestic companies have expressed an interest in the auction, one-third of which are private investors, said Zhang on Wednesday, declining to provide a precise date or the number of shale gas blocks to be offered.
Interfax understands there may be between 10 and 17 blocks on offer, but that little geological data has been provided.
Li Yuxi, an official from the MLR, told Interfax on Wednesday that blocks in 10 administrative areas – municipalities, provinces, and autonomous regions – would be on offer in September.
The central government may permit foreign companies to bid in a future third tender, Zhang added. Such a move would mark a major departure from China’s present shale gas development policy, which bars foreign companies from bidding in auctions and only permits them to form cooperation agreements with winning domestic bidders.
Companies that may table bids in the forthcoming auction include the country’s five largest state-owned power producers and provincial energy groups, the National Energy Administration said on Tuesday, citing a report by the semi-official China Petroleum and Chemical Industry Federation.
The report did not name the power producers, but was likely referring to China Huaneng Group, China Datang, China Guodian, China Huadian, and China Power Investment.
Huaneng was first among the five to expand into shale gas when it agreed in November 2011 to invest RMB 100 billion in southwest China’s Yunnan province over the next five years on energy projects including shale gas (see Dark horse enters Chinese shale gas sector, 23 January 2012).
Huadian followed in February by signing a strategic cooperation agreement with the government of Hunan province to explore and develop two shale gas blocks in northwest Hunan – a move that appeared to bypass the MLR’s auctioning process entirely (see China Huadian to explore for shale gas in Hunan Province, 28 February 2012).
China held its first shale gas exploration rights auction on 27 June 2011. While four of the country’s most prospective blocks went under the hammer, only two were successfully auctioned.
Sinopec won rights to survey the 200,000 hectare (49,420 acre) Nanchuan block in Chongqing. Henan Coal Seam Gas will explore the Xiu hill block crossing the borders of Chongqing, Guizhou and Hunan province.
Guizhou province’s Suiyang and Fenggang blocks failed to attract significant bids, an anonymous source close to the MLR told Interfax at the time.
Last year, the MLR reclassified shale gas as an independent mineral resource, allowing any domestic company with sufficient funds, technology and expertise to bid for exploration rights.