VZCZCXRO6903
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3110/01 3170856
ZNR UUUUU ZZH
P 130856Z NOV 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 6831
RHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BEIJING 003110 
 
SIPDIS 
SENSITIVE 
 
EEB/ESC/IEC Energy Officer Alex Greenstein 
USDOC FOR 4420 
 
E.O. 12958: N/A 
TAGS: ECON ENRG SENV EPET CH
SUBJECT: THE POTENTIAL FOR SHALE GAS DEVELOPMENT IN CHINA 
 
REF: SECSTATE 111742 
 
SENSITIVE BUT UNCLASSIFIED: NOT INTENDED FOR INTERNET DISTRIBUTION 
 
¶1. (SBU) Summary:  There is significant potential for shale gas 
development in China.  Total resources are estimated to be 100 
trillion cubic meters.  Shale gas resources have been studied for 
the last five years and exploration began this year.  The Chinese 
government and state-owned enterprises are heavily involved in 
research and exploration as they probably will be in production. 
Foreign firms must form joint ventures with one of the SOEs to 
undertake development in the oil and gas sector.  But as demand for 
energy has increased, foreign partners have become more welcome and 
there is a need for foreign expertise in geologically complex 
extraction technology.  Natural gas usage in China has increased 
rapidly in recent years and the Chinese government plans to increase 
the share of natural gas in total energy consumption to 10 percent 
by 2020.  This cable provides responses to questions posed in Reftel 
SECSTATE 111742.  End Summary. 
 
¶2. (SBU) Are there gas-bearing shale formations? 
 
According to the National Energy Administration, total shale gas 
resources in China are estimated to be 100 trillion cubic meters and 
are widely distributed in the Songliao, Erdos, Turpan-Hami, and 
Junggar basins, as well as other regions (marine strata) in the 
South.  It is estimated 15 to 30 trillion cubic meters of the total 
are distributed in these major basins and regions; the mean value of 
these estimates is 23.5 trillion cubic meters.  The U.S. Energy 
Information Administration reportedly estimates that by 2035, shale 
gas could represent 62 percent of the total gas produced in China. 
 
¶3. (SBU) Are energy companies exploring for shale gas? 
 
The shale gas industry in China is in its infancy. The first shale 
gas exploration project began in October 2009 and is being 
undertaken by the Ministry of Land Resources in Qijiang County, 
Chongqing Municipality. 
 
China National Petroleum Corporation (CNPC), a state-owned 
enterprise (SOE), started studying shale gas resources in 2005 with 
petroleum companies from the U.S. and other countries.  In September 
2009 the National Energy Administration said CNPC is currently 
preparing to pilot test production.  It is estimated that shale gas 
production in the test areas will reach 1 billion cubic meters per 
year between 2011 and 2015. 
 
The Harding Shelton Group from Oklahoma is working with 
CNPC/PetroChina's Research Institute of Petroleum Exploration 
Development (RIPED) to identify exploration opportunities.  The U.S. 
company has also agreed with Yangtze University to open the Yangtze 
University Harding Shelton Shale Gas Research Center.  SINOPEC, 
another SOE, also has shale gas rich reservoirs on its land and is 
seeking technical cooperation with U.S. companies on shale gas 
exploration and production. 
 
¶4. (SBU) What kind of data/surveys are available on gas-bearing 
shale? 
 
The Ministry of Land and Resources' Strategic Research Center for 
Oil and Gas Resources and the China University of Geosciences 
(Beijing) began studies on shale gas resources as far back as 2004. 
In July 2009, the Department of Energy announced the creation of the 
U.S.-China Clean Energy Research Center, which will concentrate on 
building energy efficiency, clean coal including carbon capture and 
storage and clean vehicles.  Shale gas development has also been 
identified as an area of interest. 
 
¶5. (SBU) What is the regulatory environment for oil and gas 
development?  What are the relevant host-government policies with 
regard to land use and water use? 
 
Responsibility for oil and gas development regulation is currently 
split among a number of institutions.  For the entire sector, this 
bureaucratic disorder has historically impeded coordination across 
ministries, as well as held back the formulation, implementation and 
enforcement of energy policies.  Of the more than one dozen 
government agencies with authority in the energy sector, the most 
important is the National Development and Reform Commission (NDRC). 
The three large state-owned energy companies or SOEs (Sinopec, 
CNPC/PetroChina, and China National Offshore Oil Corporation 
(CNOOC)) also play a quasi-official role in initiating major energy 
projects and proposing policies, with the government subsequently 
adopting or approving what the SOEs have already initiated.  In 
recent years, there has been discussion of creating of a ministry of 
 
BEIJING 00003110  002 OF 002 
 
 
energy (the last one having been abolished in 1993).  Opposition to 
doing so has been led by NDRC and the SOEs. 
 
The latest in a series of bureaucratic reforms aimed at improving 
energy policies and regulations took place in March 2008 when the 
National People's Congress (NPC) approved the creation of the 
National Energy Commission (NEC), which replaced the Energy Leading 
Group within the State Council.  The National Energy Administration 
(NEA), which replaced NDRC's Energy Bureau and other energy offices, 
was also created.  The NEC's mandate is to improve policy 
coordination and draft a national energy development strategy and 
the NEA handles NEC's daily affairs.  Analysts believe that this 
bureaucratic reshuffling is unlikely to substantially improve energy 
policy-making.  As it stands today, foreign firms must form joint 
ventures with one of the SOEs to undertake development in the oil 
and gas sector.  But as demand for energy is booming, the government 
has become more receptive to foreign partners. 
 
¶6. (SBU) Does China have the infrastructure to support this type of 
exploration/production?  Are international energy companies 
operating in country?  Is there the capacity to build and maintain 
drilling rigs?  Are there oilfield service companies in country? 
 
SOEs, private Chinese companies, and foreign companies account for 
about 66 percent, 19 percent, and 15 percent of the oil and gas 
equipment market respectively.  Most equipment is therefore sourced 
domestically but there is a need for foreign expertise in 
geologically complex extraction technology.  The September 2009 
U.S.-China bilateral Oil and Gas Investment Forum featured 
"unconventional gas" (including shale gas) as a major focus, and 
there appeared to be strong Chinese interest in technical/commercial 
cooperation in exploiting shale gas and other unconventional gas 
resources. 
 
¶7. (SBU) What is China's energy mix?  What is natural gas' role?  Is 
there potential for expanding its use in power or transport? 
 
Coal is the major source of primary (or unprocessed) energy consumed 
in China (68.7 percent in 2008).  Oil is the second-largest, 
accounting for 18 percent.  Hydropower, nuclear power and wind power 
account for another 9.5 percent.  Natural gas is comparatively 
small, representing only 3.8 percent of China's energy consumption 
in 2008.  This share is slowly increasing and in absolute numbers, 
natural gas usage in China has increased rapidly in recent years. 
The Chinese government has supported the initial development and 
utilization of clean energy in general. Natural gas (including 
liquid natural gas or LNG), has attracted a lot of attention.  The 
NEA has repeatedly expressed to the Department of Energy strong 
interest in learning how the U.S. built its gas distribution system. 
 China wants a distribution system to match its LNG sector growth 
plans. 
 
The recent growth of natural gas consumption can be attributed to 
all sectors: industrial, petrochemical, power, and residential. 
Based on CNPC estimates, in 2008, industry usage accounted for 30.5 
percent of total natural gas consumption, the petrochemical sector 
31.5 percent, urban residential usage 28 percent and the power 
sector 10 percent.  According to SINOPEC, data released in 2007 show 
that natural gas consumption by the industrial and petrochemical 
sectors has been decreasing since 2000.  The use of natural gas in 
power generation has been increasing, by 4.1 percent in 2000 and 
about 10 percent in 2008.  The use of natural gas in transportation 
(mainly taxis and public transit) has also been increasing, 
primarily due to government support.  Sichuan, a province rich in 
natural gas, has more potential for using natural gas in 
transportation than in other sectors.  Analysts believe that future 
gas growth will be led by the power and residential/commercial 
sectors. 
 
According to China's 11th Five-Year Plan, natural gas consumption 
will reach 5.3 percent of China's primary energy consumption in 
¶2010.  The Chinese government also plans to increase this share to 
10 percent by 2020.  The U.S. Energy Information Administration 
estimates that China's natural gas demand will nearly triple by 
¶2030. 
 
HUNTSMAN