Will China embrace a shale gas boom?

The upcoming launch of a new shale gas tender has led some to speculate that the country may be looking to natural gas to ease a nationwide energy crunch.

Wang Dawei, an official with the Ministry of Land and Resources, recently disclosed that the ministry will start its second auction of shale gas in July. More than 70 companies have voiced a desire to participate, one-third of which are private companies.

Buoyed by the news, shares of shale gas developers rallied on Thursday, lifting the oil sector by 4.7 percent despite a falling benchmark Shanghai Composite Index.

China has huge reserves of shale gas. If industrialized production is realized, it would significantly ease the nation's energy strain, said Li Shousheng, deputy head of the China Petroleum and Chemical Industry Federation.

Shale gas is an unconventional type of natural gas that is formed by gas trapped within shale formations. With methane as its main ingredient, it is a clean and high-efficiency energy resource.

China's land reserves of shale gas total 25.08 trillion cubic meters, excluding those in Qinghai and Tibet, MLR data showed.

To tap the potential of its reserves, the Chinese government has unveiled a string of policies to boost production. At the end of last year, the State Council, or China's cabinet, defined shale gas as a type of mineral resource. In March, the government released the 2011-2015 plan for the shale gas industry. Major shale gas development zones will be established during the period.

State-owned petrochemical heavyweights such as PetroChina, Sinopec and Henan Provincial Coal Seam Gas Development and Utilization Co Ltd have tested the waters by making efforts to acquire and collaborate with overseas owners and developers.

China currently has 62 shale gas wells in trial development zones, 24 of which have been able to generate output qualified for industrial use.

Not everyone has been quick to sing the praises of shale gas exploitation. Liu Yijun, a professor with the China University of Petroleum, said China's shale gas development is still in a primary stage, and has a long way to go towards mass commercial use.

Shale gas is removed from shale deposits through a complicated process called hydraulic fracturing, or "fracking".

A researcher with Sinopec, the nation's largest refiner, singled out two difficulties faced by Chinese drillers: tough geographical conditions and a technological barrier.

Compared with the United States, China's shale gas is haphazardly distributed, and uncertainties still remain in the reserve appraisal process, he noted.

In addition, domestic developers still largely rely on foreign technology, equipment and materials, making costs stubbornly high.

Zhou Jiping, president of PetroChina, said the future of China's shale gas industry will depend on the accuracy of the reserves' data and independently developed technology.

Environmental impact has also complicated shale gas development in China. Since the drilling process consumes huge amounts of water and land, a number of projects have been suspended in some countries.

Christof Ruehl, chief economist at BP, said China's huge energy demands will make it impossible for the country to give up on shale gas, adding that the key lies in technological innovation to make development safe and efficient.

Creating an effective business model is another test for the industry. In the United States, small companies lead the field in technological research and commercial application. Big companies adopt their methods only after the smaller ones score stable returns.

China's shale gas industry has not formed an effective business model yet, Liu Yijun said.

At a meeting last week, Liu Tienan, deputy head of the National Development and Reform Commission, said the shale gas industry should be open to all types of investors, adding that departments involved should offer tax and fiscal incentives to investors.