Sep 19, 2012 03:46 PM

Foreign, Domestic Firms Show Interest in Newest Round of Shale Gas Bidding


(Beijing) – Domestic and foreign companies say they are interested in public bidding for shale gas exploration rights in China.

On September 10, the Ministry of Land and Resources said it was lowering the threshold for bidders in the sector. This is the first time that the Chinese government has allowed both private companies and joint-venture firms to access upstream rights in the oil and gas industry.

The 20 shale gas blocks involved in this latest round of bidding are in places such as Guizhou, Hunan and Hubei and cover a total area of 20,000 square kilometers.

"Our company will definitely participate in the second round of bidding," said an executive from Xinjiang Guanghui Energy Co. Ltd., the largest private oil and gas firm in China.

A variety of firms submitted applications, said Zhang Dawei, deputy director of the ministry's oil and gas research center. Even real estate and investment companies showed interest.

Foreign firms were surprised they would be allowed to form joint ventures with Chinese companies that hold majority stakes.

"It was interesting," Gavin Thompson, director of Asia-Pacific natural gas research at consulting firm Wood Mackenzie, said.

Allowing foreign companies to participate was an indication that the government wanted to speed up the pace of shale gas development, he said.

Currently foreign companies can only work with licensed local firms on the basis of a production sharing contract (PSC). A PSC is an international common practice used by governments to share production profits with a contractor, but the latter incurs all exploration, development and production costs. In joint ventures, foreign companies' investment, risks and returns are all in proportion to their shares.

However, sources in foreign oil firms said they were being cautious. Many international oil firms did not expect the ministry to lower entry barriers, so they were just starting to contact their Chinese counterparts, leaving them less than 50 days before the bid submission deadline of October 25.

Royal Dutch Shell Plc. was in talks with a Chinese oil firm about establishing a joint venture, a source from the Dutch-British company said.

The ministry said winning bidders must establish a company in the provinces where the shale gas blocks were located. This would allow local governments to collect more taxes, as an incentive for local governments to provide better infrastructure for shale gas projects.

However, private companies have traditionally had a difficult time maintaining good relations with local governments, an industry insider who declined to be named said.

In fact, some state-owned enterprises (SOEs) have forged ties with local governments as strategic partners to explore shale gas resources. China Huadian Corp. signed cooperative frame work with Hunan government in February and set up a local brunch in August. The State Development & Investment Corp. inked a partnership with the Chongqing government in June, and China Huaneng Group has a similar deal with Anhui Province. Industry insiders said SOEs want to get a foot in the door before the bidding closes.

Companies that won bids would most likely have strong connections with local governments, UBS analyst Yan Beina said.

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