Local Firm to Drill for Shale Gas in Guizhou

A local company Friday won the rights to explore and develop a shale gas block in the landlocked, southwest province of Guizhou in China’s first public auction of the mining rights for the unconventional resource.

Local government-backed Guizhou Industrial Investment (Group) Co., an investment conglomerate with businesses spanning mining, energy, property and finance, bid 1.29 billion yuan ($193 million) for the right to start commercial development of shale gas over three years, according to the Ministry of Land and Resources (MLR). The buyer can extend the operation for two more years if production in the first three years reaches targets.

The 695 square-kilometer Zheng An block, located in the mountainous region in northern Guizhou, includes the Anye-1 exploration well with proven daily gas flow of more than 100,000 cubic meters.

“This is the first public auction of exploration rights for a shale gas block with proven reserves,” said Guo Jiaofeng, a natural resources expert at the Development Research Center of the State Council. Guo added that the proven reserves of the Anye-1 well are considered commercially viable, although geological conditions will increase development costs compared with those of the Fuling project in Chongqing, China’s first large shale gas field, operated by state giant Sinopec Group.

The auction was part of China’s plan to bolster domestic production of natural gas, particularly shale gas, to reduce reliance on crude oil imports and shift to cleaner energy. Since 2012, the government has promoted shale gas development by supporting shale technology research, providing fiscal incentives, reforming natural gas pricing and pipeline transportation, and opening up the sector –dominated by state-owned oil companies – to new entrants.

The MLR opened the auction on the Zheng An block in early July, with a starting price of 42 million yuan. According to the agreement, the buyer would also pay for the early-stage exploration costs of the field totaling more than 70 million yuan, in addition to the rights fee.

In 2012, aiming to achieve a U.S.-style shale boom, China set a plan to produce an ambitious 60 billion to 100 billion cubic meters of shale gas by 2020. Official data showed that China's exploitable shale gas reserves are estimated at 21.8 trillion cubic meters, with proven reserves at 544.1 billion cubic meters.

But efforts to develop shale gas blocks have been hindered by high drilling costs and geographic complexity. By 2014, the State Council had cut China's 2020 shale gas production goal in half, to just over 30 billion cubic meters, an acknowledgement of the significant obstacles the country faces.

Shale gas production increased 76% last year to 7.9 billion cubic meters, according to the MLR. A total of 8.79 billion yuan was spent prospecting for shale gas last year.

Contact reporter Han Wei (weihan@caixin.com)