The National Development and Reform Commission has approved the establishment of a shale gas demonstration project in Yan'an, conducted by the Shaanxi Yanchang Petroleum Group Co Ltd, the local government of Shaanxi province said.

The project -- the first national-level shale gas project in the country -- has an area of 4,000 square kilometers in Shaanxi province, and is seen as a big step for the local oil and gas company.

During the 12th Five-Year-Plan period (2010-15), the demonstration project is scheduled to explore geological reserves of 150 billion cubic meters and generate an annual output of 500 million cubic meters.

The company has 16 gas wells so far, with a daily output of 1,000 to 2,000 cubic meters.

The Chinese government has recently released its shale gas development plan for the 12th Five-Year-Plan period. The plan stated that 13 provinces -- including Shaanxi, Sichuan and Chongqing -- are key areas of the shale gas industry and will build 19 exploration and development projects in these places.