Paulson Papers On Energy and Environment

China’s Elusive Shale Gas Boom
Zhongmin Wang
March 2015

 Paulson Papers On Energy and Environment
About the Author
Zhongmin Wang
Zhongmin Wang is a Fellow at Resources for the Future (RFF). His research focuses
primarily on energy economics and policy in the United States and China. His recent
work has studied the history, market structure, and impact of the shale gas industry in
the United States and compared the shale gas situation in China with the US experience.
Other recent work on China covers areas such as green growth, carbon cap and trade,
housing, and transportation. His work has appeared in the Journal of Political Economy.
Prior to joining to RFF in September 2012, he was assistant professor of economics at
Northeastern University, Boston and Monash University, Melbourne, Australia, and a
lecturer at China University of Petroleum, Beijing. He holds a PhD in economics from
Georgetown University and a BS and MA in management from China University of
Petroleum.

Some of the ideas in this paper first appeared in Tian L., Wang, Z., Krupnick, A. and
Liu, X. 2014. “Stimulating Shale Gas Development in China: A Comparison with the US
Experience,” Energy Policy 75: 109-116.
Cover Photo: Daniel Foster/Flickr

 Paulson Papers On Energy and Environment
Introduction

C

hina’s natural gas market is
expected to see robust growth
over the next decade. This is a
function of several factors. First, as
part of the country’s effort to effect
an energy transition to cleaner fuels,
natural gas is viewed as a viable bridge
fuel. Second, China’s natural gas
consumption is significantly below the
global average, implying a potential
for tremendous growth. Finally,
several economic drivers seem to
favor increasing consumption of gas,
not least of which is China’s emphasis
on urbanization in supporting future
growth.
A centerpiece of China’s natural
gas strategy is to develop its ample
shale gas reserves, a topic of much
discussion both inside and outside
China. With the largest technically
recoverable shale reserves in the
world, China desires to replicate the
US shale gas boom. This desire is
reflected in Beijing’s plan, unveiled
in March 2012, for the country to
achieve a highly ambitious shale gas
production target of 60-100 billion
cubic meters (bcm) by 2020.
Consequently, Beijing has adopted a
number of policies to promote and
support shale gas development. By
late 2014, however, the State Council
had already cut China’s 2020 shale gas
production goal to just “over 30 bcm.”
The dramatic reduction of the official

target reflects an acknowledgement
that China faces great obstacles in
exploiting its shale gas resources.
At the same time, debate persists
over whether it is even in China’s best
interest to prioritize shale gas over
the development of conventional
and other types of unconventional
gas. China’s conventional natural
gas production is still growing, and
the country has large reserves of
tight gas and coal-bed methane
(CBM).1 Moreover, China’s national
oil companies (NOCs) have mature
technologies for getting these types of
unconventional gas out of the ground.
Even the China National Petroleum
Corporation (CNPC), the country’s
largest onshore oil and gas producer,
has publicly argued that it makes more
sense to emphasize tight gas and CBM
over shale.2
While acknowledging the debate,
this paper focuses specifically on
China’s shale gas development and the
prospects ahead should China decide
to proceed toward its stated targets.
It discusses China’s fundamental
challenge in developing shale
resources, summarizes the policies
that the Chinese government has
taken in this effort, and concludes with
thoughts on how China might be able
to overcome its challenges.

China’s Elusive Shale Gas Boom
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 Paulson Papers On Energy and Environment
The Fundamental Challenge

C

onceptually, it is useful to
separate shale gas development
into two stages. The first,
or the innovation stage, is the
development of cost-effective
extraction technologies, which can
only be achieved through “learning
by doing” and technology innovation.
Once technologies are proven costeffective, shale gas
development enters
the second, scalingup stage, which
involves significantly
ramping up
output. Continued
technology
improvements in
the second stage
help improve
profitability
and expand
Photo: Daniel Foster/Flickr
development into
new plays.
The first stage is much more
challenging than the second. Once
drilling in a shale gas play has proven
profitable, further capital investment
in exploration and development in
it or similar plays is easy to attract,
particularly if shale gas drilling activity
remains open to profit-seeking
investors.
China, however, is still in the first stage,
in which the fundamental challenge is
to lower the cost of extraction through

innovation so that firms may find it
profitable to drill shale gas wells. That
is because, at this point, drilling shale
gas wells is simply not a profitable
enterprise in China.
To illustrate, take the case of China’s
two largest shale gas players, China
Petrochemical Corporation (Sinopec)
and CNPC. By late
2013, Sinopec had
reportedly invested
a total of $370
million in shale gas
development, while
CNPC had invested
a total of $640
million, or over $1
billion combined.3
However, that same
year Sinopec had
produced a total
of only 2.58 billion cubic feet (bcf) of
commercial shale gas and CNPC a total
of 2.47 bcf.4
Since the wellhead natural gas price
is about $9.06/thousand cubic feet
(mcf) in Sichuan5—where the majority
of shale wells are being drilled—and
the Chinese government’s subsidy
for shale gas is $1.81/mcf, a generous
estimate of the two NOCs’ total
revenue from shale gas production
puts it at just $54.4 million. This
implies that the two companies’ shortterm losses by late 2013 were close to
$1 billion.

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Why is it not profitable at present
to drill shale gas wells in China? The
simple reason is high production
costs. By definition, profit is the
difference between revenue and cost,
and revenue equals price multiplied
by quantity. Even if shale gas could
command a price of $15/mcf, the two
NOCs’ revenue would be merely $75.7
million, so their losses would still be
close to $1 billion. Various reports
suggest that the cost of drilling a shale
gas well in the Sichuan Basin is about
three to four times the $3 million
it costs to drill a similar well in the
United States.6

resource base and to understand the
geology of the targeted reservoir, and
the cost to build infrastructure such
as roads and pipelines) are not spread
over a huge number of wells, which
means cost per well is higher than it
otherwise would be. Third, drilling and
fracturing machinery may not be fully
utilized.

Another reason for the high cost in
China is the difficult geology. The
geology of shale gas resources in
China, according to engineers inside
and outside China, is considerably less
favorable than it is in North America.7
According to
Tough Earth
the Energy
The geology of shale gas resources in China,
Information
according to engineers inside and outside
So why does it
Administration
China, is considerably less favorable than it is
cost so much to
(EIA), “most
in North America.
drill a shale gas
Chinese shale
well in China? The
basins are
two primary reasons are the lack of
tectonically complex with numerous
learning by doing and economies of
faults—some seismically active—
scale and more complex geologies.
which is not conducive to shale
development.”8
For one, only a small number of shale
gas wells have been drilled in China—
The EIA report further notes that the
about sixty as of the end of 2013,
southwestern quadrant of the Sichuan
all of which were done by CNPC and
Basin—accounting for just over 50
Sinopec. This small number of wells
percent of China’s shale gas reserves—
affects the cost of development in
is the most promising shale play in
several ways.
China due to its relatively favorable
geology, water resources, existing
First, it implies that the two NOCs have
pipelines, and access to major urban
not had enough experience to learn
markets. However, its “considerable
how to improve technology and lower
structural complexity, with extensive
drilling and hydraulic fracturing cost.
folding and faulting, appears to be a
Second, the large fixed costs required
significant risk for shale development,”
for drilling (e.g., the cost to assess the
according to PetroChina engineers

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 Paulson Papers On Energy and Environment
quoted in the report. In another
report, the same authors reinforced
the point that the Sichuan Basin has
“significant geological challenges, such
as numerous faults (some active),
often steep dips, high tectonic stress,
slow drilling in hard formations, and
high H2S and CO2 in places.”9
The difficult geology renders the
existing technologies more costly, even
if using some of the best available
technologies.
CNPC and Sinopec
may not have the
world’s leading
technology, but
they are capable of
horizontal drilling
and hydraulic
fracturing since
they have been
successfully drilling
tight gas wells for
many years. Even Photo: Bilfinger SE/Flickr
for Shell, which
has a production-sharing contract with
CNPC and presumably has access to
the best technologies in the world,
several years of drilling wells in the
Sichuan Basin has not yielded much
success.
This suggests the complex geology
appears to be a major hindrance.
While Shell’s drilling and testing
indicated good resource potential,
there are “significant fault-related
problems, such as frequent drilling
out of zone and resulting doglegs that
complicated well completion.”10

In addition to geology, water scarcity
may make the cost of drilling
prohibitive in certain areas where
potential shale gas plays exist. Current
hydraulic fracturing technologies
require large amounts of water, so
it isn’t a coincidence that China has
initially focused on the Sichuan Basin
where water resources are more
abundant. However, the Tarim Basin
in Xinjiang province, where China’s
second-largest shale gas play is
located, faces severe
water scarcity.
“Over 95 percent
of the Tarim play is
subject to extremely
high baseline
water stress or
arid conditions,
including areas
with extremely
high groundwater
stress and seasonal
variability. Collectively, these
conditions will pose major challenges
for companies to access water,”
according to the World Resources
Institute.11
If the geology (and depth) of the shale
gas resources in the Sichuan Basin
were very similar to that of the major
shale gas plays in the United States,
there would be little doubt that firms
would have great incentives to drill
wells in that area. As noted above,
firms can receive $11/mcf for shale
gas in the Sichuan area, after the
government subsidy is taken into

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 Paulson Papers On Energy and Environment
account. In comparison, US natural gas
prices have hovered around $4/mcf
recently, but firms are still profitable
drilling shale gas wells in the United
States.
To be sure, China’s lack of
infrastructure, the rough terrain, and
the need to transfer technology from
the United States are all factors that
can lead to incremental increases in
production cost. But those costs can
be calculated quite precisely and can
surely be lowered to below $7/mcf
fairly quickly.

Nonetheless, the tougher geology
and other suboptimal conditions
mean that China will continue to face
difficulties in lowering costs in the
near term. Leveraging economies of
scale (by drilling thousands of wells)
and continued innovations can lower
costs. But they require large initial
capital costs and sustained investment
in innovation. Given the considerable
uncertainty over whether and when
firms would be profitable in drilling
their shale plays, firms are likely to
remain hesitant to invest generously in
drilling wells.

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 Paulson Papers On Energy and Environment
Current Shale Gas Policies in China

T

hese uncertainties, however,
have not prevented the Chinese
government from taking an
active role in planning and supporting
the development of shale gas. In
March 2012, four government
agencies jointly issued the “12th FiveYear Plan for Shale Gas Development.”
In October 2013, the National Energy
Administration (NEA) introduced a
shale gas industrial policy document
that declared shale gas development
to be a new national strategic industry.

majority-owned by the Chinese state
and their top executives are directly
appointed by the central government.
These executives wear dual hats and
respond to both commercial and
political incentives.
 
The Chinese state, represented by the
central government, owns oil and gas
mineral rights. Land rights are separate
from mineral rights and belong to the
state in the case of urban areas but
are collectively owned in the case of
rural and suburban areas. Chinese
The broad policy
policies on oil
package included
and gas mineral
Opening shale gas development to new
fiscal and research
rights require the
entrants will be important if China is to
and development
NOCs to register
galvanize more competition.
(R&D) funding
their blocks of
support to
oil/gas resources
promote shale gas
with the Ministry
development, opening up the sector
of Land and Natural Resources (MLR)
to new entrants, and reforming natural
and cede their control if they do not
gas pricing and pipeline transport.
make investments in a timely matter.
Each of these baskets is briefly
However, this latter requirement has
discussed below.
not been enforced.
Allowing New Entrants
First, some context is needed, which
merits a brief summary of China’s
oil and gas industry. Three vertically
integrated NOCs—CNPC, Sinopec,
and China National Offshore Oil
Corporation (CNOOC)—essentially
control the production, service, and
transportation sectors of China’s oil
and gas industry. The three NOCs are

Nearly 80 percent of the prospective
shale gas reserves with the highest
potential overlap with conventional oil
and gas reserves, and the exploration
rights to the overlapping areas have
been granted to the NOCs. The
control of these production blocks
in the hands of the NOCs means
the sector naturally keeps out new
entrants, making the sector much less

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 Paulson Papers On Energy and Environment
competitive than it is in the United
States, where shale development
originated with wildcat entrepreneurs
willing to take on risks.
Even CNOOC, the smallest of the three
and historically focused on offshore
production, has a hard time competing
with CNPC and Sinopec in shale plays.
Therefore, opening shale gas
development to new entrants will be
important if China is to galvanize more
competition. In fact, the effort to do
so has been one of the most visible
policy initiatives from Beijing. As a
first step in implementing this policy,
MLR tendered its first round of shale
gas block auctions in June 2011. Six
firms—the three NOCs, a provincial oil
company, and two state-owned CBM
firms—were invited to submit bids
on four shale gas blocks. In the end,
Sinopec and one of the CBM firms
each won a block.
The second step was the State
Council’s approval of shale gas as a
new type of mineral in December
2011. On the one hand, this step
allows the NOCs to keep their
control over conventional oil and gas
resources; on the other, it allows MLR
to open shale gas development to new
entrants, including privately owned
firms.
The third major step was a second
round of auctions that MLR conducted
in September 2012. That round
included a total of 20 shale blocks
that do not overlap with conventional

oil and gas resources. While it is
widely acknowledged that most of
the acreage that was being auctioned
have worse geology and infrastructure
than those already belonging to the
NOCs, that round of auctions was open
to essentially all domestic firms (and
international firms that are majoritycontrolled by domestic firms) with
a registered capital of at least 300
million yuan ($50 million). In early
December, MLR announced that a
total of 16 firms, out of 83 firms that
submitted bids, won 19 of the 20
blocks.
The bidding results were somewhat
peculiar, however. First, the NOCs
did not win any of the blocks, and
none of the auction winners had any
experience in oil and gas exploration
and development. Some of the
winning firms are in the business of
power generation, some are energy
investment firms, and some were
established just a few months before
the auction. Second, the winning
firms’ promised investment amount
is, on average, 670 million yuan ($110
million) per block, which is far above
the minimum requirement of 90
million yuan ($15 million) per block.12
Fiscal Incentives
In November 2012, China’s Ministry
of Finance (MoF) and NEA jointly
announced a fiscal subsidy of $1.81/
mcf for shale gas production, effective
from 2013 to 2015. The definition
for shale gas in the subsidy notice

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 Paulson Papers On Energy and Environment
appears to be narrow. According to an
MLR official, only 5 to 7 trillion cubic
meters (tcm) of the 25 tcm of shale
gas reserves MLR estimated for China
satisfies the shale gas definition.13 The
duration of the subsidy period is short,
but the notice mentioned that the
government may extend the subsidy
beyond 2015, depending on the status
of development.
Additional fiscal
support was
contained in the
NEA’s shale gas
industrial policy
document. First,
two types of mineral
resource fees are
to be reduced or
exempt for shale
gas development.
Second, tariffs
Photo: Gerry Dincher/Flickr
are to be waived
for importing
equipment that cannot be domestically
produced. Third, further tax incentives
are to be studied.
However, there appears to be interagency disagreement over the extent
of fiscal support for shale gas. The
finance ministry reportedly holds the
opinion that the existing fiscal policies
already satisfy the need for shale
gas development in China, and that
it will not offer more favorable fiscal
policies.14

R&D
The five-year shale gas plan touches
on broad R&D policies but fails to
include concrete details. It states that
the government aims to increase
the funding for investigating and
evaluating shale gas resources in
China and that a research program on
critical shale gas technologies is to be
established as a major national science
and technology
project. It further
states that the
government aims
to strengthen
the development
of the national
shale gas R&D
center and other
major shale gas
laboratories and
to establish shale
gas demonstration
areas. The shale gas R&D center was
established in 2010 and is part of
the Research Institute of Petroleum
Exploration and Development, which is
a research arm of CNPC.
Some of these are not entirely new.
The Chinese government had already
supported several large shale gas R&D
projects through its “National Basic
Research Program (973 Program)” and
other major science and technology
funding schemes. In fact, much of the
language on R&D appeared in NEA’s
“National Energy Technology 12th FiveYear Plan” issued in December 2011.

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 Paulson Papers On Energy and Environment
The lack of details likely reflects the
fact that most of the R&D will come
from the NOCs, since they essentially
monopolize oil/gas exploration and
production. It also suggests R&D
spending will be primarily shouldered
within these firms rather than
explicitly from central coffers. The
bottom line is that Beijing is pushing
the firms to adopt the most advanced
technologies.
Gas Pricing
The Chinese government has long
set the price of conventional natural
gas and tight gas at levels below the
equilibrium market price. The domestic
natural gas price is also lower than its
imported price. As a result, natural
gas shortages often occur. In light of
these problems, China has started to
reform its natural gas pricing policies.
Under the new pricing system that the
National Development and Reform
Commission (NDRC) announced in
June 2013, province-specific city-gate
price caps are linked to the import
price of two types of substitute fuels
(fuel oil and liquefied petroleum gas)—
essentially moving to an oil-linked
pricing system for natural gas.
However, this pricing scheme
applies only to incremental volume
consumption (as opposed to existing
volume consumption) and for nonresidential users only. This interim

pricing scheme is still quite far from
the ultimate goal of establishing
a system in which the market
determines all natural gas wellhead
prices and only the price of pipeline
transportation is regulated by the
government.
Still, this represents a step forward,
as the wellhead price of shale gas has
been deregulated, even as city-gate
gas price may still be subject to a price
cap, depending on how the gas is sold
and transported.
Pipelines
Inadequate natural gas pipeline
infrastructure and the lack of an open
access policy to existing pipelines are
often cited as a hindrance to shale gas
development. This is in part because
the NOCs own and operate virtually all
of China’s major pipelines.
In February 2014, NDRC issued a
new policy on the development and
operations of natural gas infrastructure
that requires pipeline operators to
maintain independent accounting
and to provide unused pipeline
capacity to new customers on a fair
and nondiscriminatory basis. This is
a limited open access policy—new
customers only have open access to
those capacities that are currently not
being used by existing customers and
pipeline operators.

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Whither China’s Shale Boom?

P

utting aside the debate over
whether it is economically
justified to prioritize China’s
shale gas over conventional natural
gas and tight gas, we conclude with a
brief assessment of whether Beijing’s
policies can spur the shale boom that
it intends to achieve. The assessment
presumes that it is justified to
emphasize the development of shale
gas resources.
Some of the
policies described
above—subsidy,
pricing incentives,
and R&D policies—
aim to make shale
gas production a
more attractive
proposition to firms
by helping to boost
their revenue or
Photo: Matthew Phillips/Flickr
enhance existing
technology. Other policies—reforming
natural gas pricing and opening access
to pipelines—aim to boost the natural
gas market in general. These policies
reinforce each other in principle and
appear justified on economic grounds.
For instance, fiscal subsidies and
R&D support can be justified on the
grounds that shale gas development
has social and economic benefits (by
replacing the use of coal). Market
pricing reforms and open access to
pipelines can reduce distortions and

improve efficiencies. It is worth noting
that the US federal government used
these very policies from the late 1970s
to the early 1990s to promote its own
natural gas sector.
Opening shale gas development
to new entrants is a major policy
initiative. It is a policy intended to
break the oligopolistic nature of the
NOCs and introduce
more competition
into shale gas
development. This
policy is certainly
consistent with
the Chinese
government’s goal
of letting the market
play a decisive
role in resource
allocation.
It allows new
entrants to start to acquire oil and
gas exploration and development
experience and expertise, which will
benefit the potential scaling up of
China’s shale gas industry down the
road. Any investment in exploration by
these firms will also help China better
assess its shale gas resources.
However, this is an initial step, and
one that cannot contribute much to
overcoming the fundamental challenge
on its own—lowering costs through
learning by doing and innovation.

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 Paulson Papers On Energy and Environment
Despite winning the second round of
auctions, the new entrants have little
incentive to make the investments
they promised, simply because they
cannot avoid the fate of incurring hefty
losses in the near term.
The new entrants have no experience
in oil and gas drilling, and the shale gas
blocks they won have less favorable
geology and infrastructure than the
blocks awarded to CNPC and Sinopec.
It is unrealistic to expect firms
without any prior experience in even
conventional oil and gas drilling to dive
into developing shale gas reservoirs
with unfavorable geology.
Indeed, by the end of September
2013, reportedly only 14.2 percent of
the planned two-dimensional seismic
survey on the blocks awarded during
the second round had been finished,
and drilling essentially had not yet
started.15 Because of the slow progress
made by the auction winners, the third
round of auctions has been delayed.
The US Experience
It is useful to compare these new
entrants to a pioneering US firm,
Mitchell Energy & Development
(hereafter “Mitchell Energy”), a
medium-sized firm that is usually
credited with making initial
investments in shale gas drilling and
playing a critical role in creating the
industry in the United States.

Unlike the new Chinese entrants,
Mitchell Energy had the long-term
need to seek a new source of natural
gas to fulfill its contractual obligations,
and it enjoyed many advantages that
allowed it to minimize financial losses
and to eventually obtain high returns
on its early investments.
For one, Mitchell Energy had an
excellent team of geologists and
engineers and state-of-the-art
expertise in fracturing tight gas. The
company began drilling in an area
with favorable shale geology and with
multiple layers of natural gas reservoirs
so that it had the option of completing
the well to conventional natural gas
reservoirs if the shale reservoir turned
out to be unproductive.
The company also had access to a
mechanism through which it could
eventually obtain large returns from
its investment. It leased large tracts
of land and the associated mineral
rights at low prices early on and later
sold the land and the firm itself at a
much higher price. This mechanism—
made possible by the private land and
mineral rights ownership system in the
United States—helped to overcome
the difficulty of monetizing technology
innovations in the oil and gas industry.
Different Incentives and Vested
Interests
Even if the Chinese government
decides to auction off some of the
shale gas blocks with the most

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favorable geology, it is doubtful that
the new entrants would make large
investments in drilling shale gas wells
in the short run.

However, it is difficult for the Chinese
government to open the development
of conventional oil and gas resources
to new entrants on a large scale.
Such a policy would greatly affect the
Unlike the shale gas blocks auctioned
interests and operations of the NOCs,
in the second round, most of the
who are expected to lobby strongly
shale blocks with favorable geology
against such a policy. For example,
overlap with conventional oil and gas
they may argue that the below-market
reservoirs. If the new entrants win
natural gas prices discouraged them
such blocks, they should be allowed to
from making more investments in
drill into the overlapping conventional
developing conventional natural gas
oil and gas reservoir. It is economically
and tight gas. They may also point
inefficient to prohibit
out that they
new entrants from
assume many social
It
appears
that
China’s
best
hope
for
drilling into the
responsibilities
overcoming the fundamental challenge in
conventional oil and
(e.g., keeping
shale gas development lies with its NOCs.
gas reservoir, and it
redundant workers)
is difficult to enforce
that make them
a policy that does
appear inefficient.
not allow new entrants to drill into
conventional oil and gas reservoirs.
Encouraging Private Firms
The irony is that after winning such
shale gas blocks, the new entrants
would be more incentivized to first
develop conventional oil and gas
resources and delay drilling into
shale gas reservoirs. It is much more
profitable and less risky to develop
conventional oil and gas reservoirs
than shale because the available
technologies are cost effective for
developing the former but not yet
for the latter. This implies that the
development of China’s conventional
oil and gas resources (including tight
gas) would accelerate if Beijing allows
new entrants to develop them and lets
oil and gas prices be determined by
the market.

It is even more politically difficult
for China to implement policies
that can encourage new entrants,
especially privately owned firms, to
undertake large and risky investments
in shale gas. Private firms will expect
reasonably high returns for their
investments, but that may prove quite
challenging in the Chinese context.
Take the US experience again as an
example. Suppose one of the new
entrants succeeded in improving
technology and lowering cost after
making a large initial investment in
shale gas drilling. How does it then
monetize its innovations?

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In the United States, independent oil
and gas firms, such as Mitchell Energy,
did not monetize their innovations by
selling their new technologies because
few such technologies are patentable
and it is difficult to keep them secret
(since operators and service firms work
together).

NOCs To The Rescue?
Given these considerations, then, it
appears that China’s best hope for
overcoming the fundamental challenge
in shale gas development lies with its
NOCs. They enjoy huge advantages
over the new entrants in terms of
technology, experience, financial
resources, and policy.

Instead, these US firms largely
obtained returns for their risky bets
via leasing land and the associated
CNPC and Sinopec have significant
mineral rights at low prices: investing
experience in developing tight gas,
in drilling and
which allowed
innovations would
them to acquire
In China, there is little to no chance
subsequently make
certain advanced
that the government will allow private
the land appreciate
technologies in
ownership of land and mineral rights.
in value. The financial
horizontal drilling
reward from selling
and hydraulic
land as a valuable asset was incentive
fracturing. An important but rarely
enough to encourage independent oil
noticed fact is that the production
and gas firms in the United States to
of tight gas in the United States
take big risks.
experienced significant increases
before the shale gas boom occurred.
In China, however, there is little to no
Given that China’s NOCs already have
chance that the government will allow
the experience and technologies to
private ownership of land and mineral
develop the abundant reserves of tight
rights. Therefore, a plausible way for
gas, it seems a natural and promising
a private firm to obtain returns from
area for Beijing to focus on.
its investment is for the government
to allow this firm to have control over
Meanwhile, the “Big Two” have
a large amount of land and mineral
already invested billions of dollars in
rights. However, it is politically very
acquiring shale gas assets in North
difficult for China to auction off large
America, even though it is not clear
amounts of oil and gas resources to
the extent to which these acquisitions
private firms so that their owners,
have ultimately helped them obtain
rather than the state, can have the
the best technologies.
chance to realize greater financial
returns.
What’s more, these two NOCs have
been drilling in shale gas blocks with
the most favorable geology and

China’s Elusive Shale Gas Boom
13

 Paulson Papers On Energy and Environment
infrastructure in China, and they have
established national demonstration
areas. (CNPC has two demonstration
projects and has been cooperating
with Shell on another. Sinopec has
one demonstration area where it
announced in March 2014 that it had
made major breakthroughs.)
Under the assumption that it is
justified to prioritize and support the
development of shale gas, the key
question remains how best to motivate
the NOCs to invest in shale gas drilling.
One potential way to incentivize the
NOCs may involve incorporating shale
gas investment into the important
evaluation criterion of the top NOC
executives. Competition between
government officials and the
associated cadre evaluation system
are considered by many scholars as
a major driver behind China’s rapid
economic development.16

By increasing such political incentives,
the NOCs could be motivated to make
riskier investments in shale gas drilling
while paying less attention to the
economics of such investments. Yet
trumpeting political incentives with
no regard to economics is unlikely
to be good policy either, since it will
likely require more subsidies from the
government to cover NOC losses.
The smothering smog in many
Chinese cities is a daily reminder to
policymakers in Beijing that there is an
urgent need to replace the use of coal
with natural gas. Unfortunately, it does
not seem that a shale gas boom would
materialize soon in China. Technologies
must become more cost effective, a
process that requires strong incentives
and considerable time.

China’s Elusive Shale Gas Boom
14

 Paulson Papers On Energy and Environment
Endnotes  
China’s risked, technically recoverable tight gas reserve is 8 to 11 trillion cubic meters (tcm), and its
proven tight gas reserve is 3.3 tcm, about 39 percent of China’s overall proven natural gas reserve.
See Li, J., B. Guo, M. Zhen, and T. Yang. 2012. “Main Types, Geological Features and Resource
Potential of Tight Sandstone Gas in China,” Natural Gas Geoscience 23(4): 607–15.

1

In his speech at the 25th World Gas Conference in Malaysia on June 7, 2012, Chairman of CNPC
Zhou Jiping stated, “In the near term, CNPC will still prioritize conventional gas exploration and
development,” but that “we are actively exploring and developing tight gas, CBM and shale gas in
different stages. As for tight gas, we have found a large reserve base and owned mature development
technologies, and we are now achieving a rapid increase of production. Regarding CBM, the resource
distribution is already known and the technologies are basically mature, so we are well positioned
to realize sizable increase of output.” See Zhou, J., 2012. “The Rapidly Growing World and Chinese
Natural Gas Markets,” speech at the 25th World Gas Conference, Kuala Lumpur, Malaysia, June 7,
2012, accessed from http://www.cnpc.com.cn/en/press/speeches/The_Rapidly_Growing_World_
and_Chinese_Natural_Gas_Markets.shtml?COLLCC=515792860&.

2

“Shale Gas 12th Five-Year Target Out of Reach, Auction Winning Firms Facing Dilemma,” China
Securities Journal, October 25, 2013, accessed from http://news.xinhuanet.com/energy/2013
10/25/c_125599213.htm. (Exchange rate is assumed to be 1 yuan = $0.16)

3

“China’s Shale Gas Exploration and Development Achieved Major Progress,” National Energy
Administration, December 4, 2013, accessed from http://www.nea.gov.cn/2013-12/04/c_132940713.
htm.

4

He, Q., “Drilling Contract Reveals Cost, Shale Gas is Risky,” 21 Century Economic Herald, December
18, 2013, accessed from http://biz.21cbh.com/2013/12-17/xNNDE3Xzk4OTUxNA.html.
5

See Guo, A., “China Shale Boom Fizzles as Clean Energy, Imports Take Lead,” Bloomberg, November
20, 2014, accessed from http://www.bloomberg.com/news/2014-11-21/china-shale-boom-fizzles-asclean-energy-imports-take-spotlight.html.

6

Dong, D., Zou, C., Yang, H., Wang, Y., Li, X., Chen, G., Wang, S., Lu, Z., and Hong, Y., 2012. “Progress
and Prospects of Shale Gas Exploration and Development in China,” Acta Petrolei Sinica 33(S.1):
107-114 (in Chinese); also see Energy Information Administration. 2013, “Technically Recoverable
Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside
the United States,” Washington, DC: EIA, accessed from http://www.eia.gov/analysis/studies/
worldshalegas/.

7

8

Ibid.

Stevens, S., Moodhe, K., and Kuuskraa, V., 2013. “China Shale Gas and Shale Oil Resource Evaluation
and Technical Challenges,” Society of Petroleum Engineers (SPE) report 165832.

9

10

Ibid.

China’s Elusive Shale Gas Boom

 Paulson Papers On Energy and Environment
Reig, P., T. Lou, and J. Proctor. 2014, “Global Shale Gas Development: Water Availability &
Business Risks,” Washington, DC: World Resources Institute, accessed from
http://www.wri.org/publication/global-shale-gas-development-water-availability-business-risks.
11

Tian, T., B. Li., “Development Status of the Winning Firms in the Second Round of Shale
Gas Auction,” China5e, July 17, 2013, accessed from http://www.china5e.com/news/news-840453-1.
html.
12

Wang, X. 2012. “Ministry of Land and Resources Official Points Out that Shale Gas Subsidy
Restriction is Too Narrow,” Caixin, December 6, 2012, accessed from http://companies.caixin.
com/2012-12-06/100469440.html.
13

Hu, W.,“Shale Gas Industrial Policy Explained,” China5e, November 20, 2013, accessed from
http://www.china5e.com/index.php?m=content&c=index&a=show&catid=70&id=852465.
14

“Shale Gas 12th Five-Year Target Out of Reach, Auction Winning Firms Facing Dilemma,” China
Securities Journal, October 25, 2013, accessed from http://news.xinhuanet.com/energy/2013
10/25/c_125599213.htm.
15

Xu, C., “The Fundamental Institutions of China’s Reforms and Development,” Journal of
Economic Literature 49(4): 1076–51.
16

China’s Elusive Shale Gas Boom

 Paulson Papers On Energy and Environment
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