Breitling Oil and Gas CEO Chris Faulkner Quoted in China Energy Weekly

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Analysts were divided on whether the latest setback would undermine China’s shale gas prospects. “I don’t think the delay will have a significant slowdown on the country’s shale gas development programme,” said Huang, noting that several projects independent of the auction are underway by China’s three energy giants. The companies can also count on plenty of acreage for further exploration and development.

“The issue is whether the China’s short- and long-term production targets are practical and deliverable,” Huang said.

“I don’t think this delay bodes well for China’s shale industry,” said Chris Faulkner, chief executive of Breitling Oil and Gas, an American unconventionals player. “They can’t even seem to perform an auction, which goes to show how immature the industry is in China,” he told Interfax.

“These are prized possessions for the Chinese, and they’re cautious about relinquishing control. However, they’re going to have to come to the realisation that they will not meet their targets if they continue like this,” Faulkner added.

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DATELINE: “The likely issue [for the delays] is the lack of data and understanding of the potential assets ” the Hong Kong-based head of Asia-Pacific oil and gas for a multinational bank told

Analysts unmoved by China’s latest shale gas auction delay

Confirmation last week that China will delay its second tender for shale gas blocks came as no surprise to analysts, who expect further holdups as Beijing attempts to craft a viable strategy for tapping its vaunted shale reserves.

In the latest setback to the highly anticipated tender, China’s Ministry of Land and Resources (MLR) confirmed to Interfax last week it would hold back the licensing round until September.

“After many postponements, I will not be surprised if further delays happen,” said Huang Xinhua, a Singapore-based analyst with energy consultancy IHS.

The root of the delays is “not an easy issue to be solved properly in a short time period as it covers many aspects,” Huang said, adding that he “doesn’t expect much” from the auction. BP and Royal Dutch Shell representatives in China declined to comment on the delay.

The second tender, now slated to take place 15 months after the first, has been postponed repeatedly since the fourth quarter of 2011. Since then, state media and industry insiders have reported that the auction would take place in January, June, and August this year. The auction, however, has yet to materialise.

Enthusiasm on the part of Chinese and foreign investors has been building up over the second tender, which will open up bidding to private domestic firms and non-oil and gas companies. The first tender held in June last year was a closed auction involving six state-owned enterprises, including the big three energy giants – PetroChina Co. Ltd., China Petrochemical Corp. (Sinopec Group), and China National Offshore Oil Corp. (CNOOC).

‘Complicated issues’

The MLR did not provide a reason for the latest delay, but analysts say a number of problems are holding up the second licensing round, chief among them the MLR’s lack of experience drafting qualification criteria and competing local government interests.

“It is a very complicated issue… no experience, too many stakeholders involved, too ambitious targets, and time pressure from the top,” said Huang.

Another principal problem has been a dearth of geological data for the potential blocks on offer. “The blocks to be auctioned are more peripheral ones, and they’re not so prospective. This explains why the geological data on them is pretty sparse, as little seismic work has been done on them,” an analyst with a U.S. research firm told Interfax.

Li Yuxi, an official from the MLR, said last week that blocks in 10 administrative areas – municipalities, provinces, and autonomous regions – would be on offer in September. The blocks, however, are likely to lie outside acreage owned by PetroChina and Sinopec Group.

“Frankly speaking the blocks in the auction are less attractive than many acreages currently held by the national oil companies, according to current geological understanding,” said Huang from IHS. “Having said that, it is possible some good blocks exist, which we don’t know [about] because we don’t have data.”

The lack of data and unappealing blocks appears to have soured interest in the auction. “There’s been some trouble getting enough bidders,” said the analyst. “Also, those successfully registered bidders are raising their prices for joint agreements, so companies looking to partner with them are seeing the cost of entering the market increase.”

in terms of spending beyond seismic for example”, the banker said.

With some many questions remaining about the nature of the assets to be put under the hammer, and the sizeable up-front capital that will be required to exploit discovered shale deposits, it is perhaps not surprising that interest in the much-delayed tender is waning. The cost of drilling for shale gas in China is approximately RMB 20,000 ($3,169.88) per meter for vertical wells and $4,754.82 per meter for the horizontal variety, Interfax previously reported. Capital required for a 3,000 meter well can exceed $15 million – much higher than drilling costs in the U.S.

Developing a flexible regulatory framework that balances the interests of risk-adverse investors and local governments keen on shale gas to boost the local economy “may take time as locals probably want as much as possible in terms of commitments while [the central government] may understand better that this may not work,” he said.

Political considerations

A politically charged leadership change set to begin in autumn may be distracting officials tasked with mapping out China’s shale gas development. The Communist Party’s hopes of a smooth transition were dashed in March, when Bo Xilai was ousted as the high-flying party chief of Chongqing Municipality in connection with the death of British businessman Neil Heywood. Chongqing happens to be one of China’s most promising shale gas development areas.

“Given the leadership transition, you should expect delays with the auction,” said the analyst with the U.S. research firm.

Future impact

Analysts were divided on whether the latest setback would undermine China’s shale gas prospects. “I don’t think the delay will have a significant slowdown on the country’s shale gas development programme,” said Huang, noting that several projects independent of the auction are underway by China’s three energy giants. The companies can also count on plenty of acreage for further exploration and development.

“The issue is whether the China’s short- and long-term production targets are practical and deliverable,” Huang said.

“I don’t think this delay bodes well for China’s shale industry,” said Chris Faulkner, chief executive of Breitling Oil and Gas, an American unconventionals player which is currently shooting seismic on some of China’s shales. “They can’t even seem to perform an auction, which goes to show how immature the industry is in China,” he told Interfax.

“These are prized possessions for the Chinese, and they’re cautious about relinquishing control. However, they’re going to have to come to the realisation that they will not meet their targets if they continue like this,” Faulkner added.

The banker in Hong Kong was also pessimistic. “I am somewhat skeptical to the whole shale thing in China – not that I don’t think it is there – but I think first mover advantage may actually be a disadvantage as the learning curve starts very high up with the lack of data and likely equipment of adequate quality and quantity, along with the well-known water resources issue.”

A number of experts have flagged China’s water scarcity as a daunting obstacle to commercial shale gas development, due to the large volumes of clean water needed to hydraulically fracture shales.

Two-thirds of China’s 669 cities suffer from water shortages, and more than 40 percent of the nation’s rivers are severely polluted, according to an academic paper by researchers from Michigan State University’s Center for Systems Integration and Sustainability published earlier this month.

“Shale gas in China will happen but it will take time… many years to get to the scale reflecting talk about reserves, and 2020 earliest to make a difference,” the Hong Kong-based banker said.