Of all the countries that have completed basic test explorations, China has the largest estimated recoverable shale gas reserves in the world at about 25 trillion cubic meters. According to a U.S. Energy Information Agency-commissioned report, the country is home to seven shale basins, two of which — Sichuan basin in Sichuan province and Tarim basin in Xinjiang Uighur Autonomous Region — have the potential for large-scale production. Beijing has stated that it hopes to produce 6.5 bcm of shale gas per year by 2015 and 80 bcm per year by 2020. (By comparison, the United States currently produces some 136 bcm of shale gas annually.) The Sichuan and Tarim basins are essential to achieving that goal.

But first, China must develop the requisite techniques for extracting shale gas. To that end, Chinese oil companies have begun investing in various Western companies experienced in shale gas extraction. For example, PetroChina has invested in Canadian firm Encana Corp., while China National Offshore Oil Corp. has shares in Chesapeake Energy projects. In addition, several companies, including Royal Dutch/Shell and Chevron Corp., are investing in Chinese companies and participating in product-sharing projects. (Media reports indicate that Chevron is exploring shale basins in Guizhou province, which may also have exploitable resources.) These joint ventures often bring to China's shale gas fields engineering expertise in specific drilling techniques, including horizontal drilling and hydraulic fracturing, the preferred process for extracting shale gas.

Meeting Conditions

However, technical expertise is just one of five conditions China — indeed, any country — must meet to capitalize quickly on potential large-scale shale gas production. Some of these conditions will be easier than others for China to meet. They are as follows:

• High concentrations of natural gas in shale formations must be present.
• Companies participating in extraction projects must have expansive knowledge of regional geology and the willingness to explore potential fields.
• Huge amounts of capital must be invested in extraction projects.
• A pipeline system must be in place to transport shale gas once extracted.
• Fresh water must be readily accessible to complete the hydraulic fracturing treatments.

While China is thought to have large amounts of shale gas, these estimates are inexact. So far, the Sichuan Basin is the only basin to be explored widely, and what is found there will help determine whether China's reserves are indeed as high as estimated — and whether the recovery of the shale gas proves prohibitively expensive.

Expertise, technology and capital are relatively easy to obtain. Chinese investment in Western shale gas production sites and investment and cooperation on Chinese projects from Western companies already have aided the advancement of these three aspects to shale gas development. However, Chinese shale gas reserves generally are located deeper and in rougher terrain than U.S. deposits, requiring China to adapt technology and expertise obtained from Western companies.

For China, addressing natural gas pipeline infrastructure will be critical, albeit difficult. The Chinese geography does not lend itself to easy integration, and natural gas heretofore has played a negligible role in Chinese energy consumption. As a result, much of the existing pipeline infrastructure in China is regionalized. The construction of the East-West pipeline shows that efforts have been made to integrate and expand the pipeline network, but China still lacks a pipeline connecting the north to the south. Such issues need to be rectified to handle increased production brought on by shale gas extraction.

Notably, the pipeline infrastructure of the Sichuan Basin is one of the most developed in China because natural gas has been exploited there for some time. So while pipeline infrastructure would not need to be built from scratch, the existing infrastructure is regionalized and would have to be integrated and expanded accordingly.

Hydraulic fracturing requires millions of gallons of fresh water, so access to water is vital for shale gas extraction. The Tarim Basin's location in Xinjiang, an extremely arid region, will complicate shale gas development. However, water for hydraulic fracturing in the Sichuan Basin should not be an issue since it is located in Sichuan province, a semitropical area with plentiful rainfall and access to the Yangtze River Basin.

The Sichuan Basin's suitability notwithstanding, a rapid increase in Chinese shale production is unlikely to occur. Given the magnitude of its energy consumption, China is more likely to consume, rather than export, any natural gas it develops, but that development would help satisfy demand and improve overall energy security. Robust shale gas production could also provide leverage in negotiations with natural gas-importing countries. But even if the Chinese gain all the requisite knowledge and expertise by interfacing with Western companies, the technology needed to extract shale gas must be tailored to their geology. The existing pipeline infrastructure must be expanded and integrated, and in any event, water accessibility will be problematic for many potential fields. These issues can be addressed, but doing so will take several years at the very least.