Inexperience could hamper shale oil target (2)

Shale gas is trapped in formations previously thought to be unreachable, but technologies known as horizontal drilling and hydraulic fracturing, or fracking, have successfully unlocked deposits in the United States, making the fuel a game changer there.

The US success has put the subject under the spotlight in China, which is believed to hold the world's largest shale gas resources.

The land ministry's auctions marked the start of commercial exploration of shale gas in China, with which the government is hoping to supplement the nation's robustly growing demand for gas. That's part of a broader strategy to cut reliance on coal and oil and to protect the environment.

China's State Council has also approved shale gas as a new type of natural resource that will be managed separately from conventional natural gas.

China aims to produce 6.5 billion cubic meters of shale gas annually by 2015, and 60 billion to 100 billion cubic meters by 2020, according to official targets.

The second auction was the first time that private-sector and Sino-foreign joint ventures were allowed to participate as the government wants to bring more investors into the industry.

The 16 winning bidders included two private companies but no foreign joint ventures, though five foreign firms bid.

Together, the winners plan to invest 12.8 billion yuan (US$2.06 billion) over the next three years to explore the blocks. That was seven times higher than the minimum bid required.

China Shenhua Energy Co, the nation's leading coal producer and a successful bidder, said there were "uncertainties in the exploration achievements and development prospects for shale gas resources" because the sector was in its preliminary stages in China.

Shenhua said it was entering the sector to broaden its presence in the energy market and optimize its business model as an integrated energy company.

Beveridge said he expected new joint ventures to form between holders of the blocks and experienced oil and gas companies seeking to explore for shale in China, although this would take time.

As a result, the government target of making 80 billion cubic meters of shale gas by 2020 was "unrealistic," he said, adding that 30 billion cubic meters was more likely.