Expense, uncertainty of success keep many companies on sidelines

Eighty-three companies have made 152 bids for licenses to explore shale gas in China's second round of tenders to drill for the resource, the country's land watchdog said on Thursday.

But even more companies have dropped the bid, expressing concern about the high risk of extraction of the hard-to-reach gas.

Workers of Sinopec's East China branch explore a shale gas block in Lianyuan, Hunan province, on Jan 7. [Photo/China Daily]

The profitability of the projects is uncertain, and the lack of technical expertise poses another challenge, they said.

It is the first time China has allowed non-Chinese entities to participate in the auction that had 20 shale gas blocks in eight different provinces on offer, including in Guizhou, Hubei and Henan provinces.

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Nineteen of the 20 blocks offered in the tender received at least three bids, the minimum required for a block's auction to proceed, according to a statement posted on the website of Ministry of Land and Resources on Thursday. A block receiving only two bids was removed from the auction.

The ministry did not reveal if private or foreign-funded joint ventures had attended.

Zhang Dawei, director of the ministry's Mineral Resources Reserves Evaluation Center, told National Business Daily that about one-third of the bidders are private firms.

Yet while many companies showed interest, others expressed their concern about the uncertain future of the shale gas projects.

A company representative who attended the tender meeting but did not place a bid said there is risk because no information is released about the shale gas reserves on the blocks. He declined to be named.

"It is hard to predict the profitability of the projects," he said. "Besides, the technology is still a problem."

Zhang Mi, chairman and president of Honghua Group, China's largest exporter of oil-drilling equipment, agreed, saying that they did not bid for any project because "no blocks with good potential returns can be seen".

He said the blocks offered for bidding are not good enough to invest in. Many blocks in Sichuan province and Chongqing, which are rich in shale gas resources, are not included in the tender. "The current situation is not absolute open to private capital to invest in shale gas industry in my opinion."

Zhou Shihong, deputy director of the Chongqing land resources and housing property bureau, also warned private firms to be cautious in shale gas exploration because of its high risks, huge cost and long return cycle.

He said more than half of the private companies involved in the new energy program may lose money.

A shale gas well in Chongqing's Pengshui county, for instance, costs nearly 100 million yuan ($16 million), but commercial production cannot be expected within five years.

As such, the official advised private investment to turn to the manufacturing sectors for shale gas drilling equipment and technology innovation.

"Many private players have already given up the exploration area and stepped into manufacturing the shale drilling equipment," Zhou said.

According to industry insiders, of every 100 million yuan investment in shale gas, more than 20 million yuan goes toward purchasing equipment.

"It is a large market," said Yi Zhongrong, director of the production office of the Jianghan Oilfield of Sinopec.

Jiang Xinmin, deputy director of the Energy Research Institute of China National Development and Reform Commission, agreed.

He estimated that 4 trillion to 6 trillion yuan will be invested in the country's shale gas drilling industry by 2020 to meet China's target to produce up to 1 trillion cubic meters of shale gas in 2020.

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