China to subsidize shale gas development

November 7, 2012

China has unveiled plans to subsidize energy companies working to develop shale gas resources, a move seen by analysts as likely to help turn around a loss making industry and potentially mark a bright spot in the nation's drive for alternative energy sources.

Central government funds will back a subsidy of 6.3 cents for each cubic meter produced by shale gas extractors through 2015, according to the state-run Xinhua news agency, which cited a Ministry of Finance statement.

Additional subsidies to spur development of the industry can be provided independently by local governments, the Finance Ministry said.

Nomura analysts said move would garner interest from China's big oil companies, which so far have shown only lukewarm interest in a sector seen as too risky.

Among the hurdles to Chinese shale gas development are high costs, extended time needed to bring a project to fruition, and the slow pace of plans to liberalize domestic gas pricing.

The subsidy will likely encourage the drilling activities of upstream explorers, Nomura said in the note. China has targeted 6.5 Bcmpy shale gas productions by 2015, ramping up to 60 to 100 Bcm by 2020.

The subsidy was "positive for the economics of China shale development," the Japanese brokerage said, noting that oil and gas companies are currently struggling to develop shale gas a at a profit.

Of China's major state-controlled oil giants, Sinopec would be the biggest beneficiary, followed by PetroChina, which have plans to bring 2 Bcm and 1.5 Bcm of gas, respectively, to market in 2015. Chinese energy major Cnooc doesn't have any targets for shale gas development.

The brokerage also named Anton Oilfield Services Group and Honghua Group as oil and gas services and equipment supply companies with exposure to the development of unconventional gas.