China’s Ministry of Land and Resources (MLR) has proposed carving out a special shale gas zone in the Sichuan Basin, where experimental policies could be pioneered to open up the state-monopolised sector to more players. The idea echoes the special economic zones that China has been creating since 1980 which have helped push the country towards the path of market capitalism.

But the proposal is being resisted by China National Petroleum Corp. (CNPC) and Sinopec – which own almost all the acreage in the basin – and has also received a tepid response from local governments.

The shale gas zone would cover 45 million hectares in the basin and its periphery, straddling Sichuan, Chongqing, Guizhou, Yunnan, Hunan and Hubei, according to Zhang Dawei, director of the MLR’s Mineral Resources and Reserves Evaluation Centre.

An area of 35 million hectares would be open for exploration to all companies, including private and foreign firms, said Zhang. The zone would contain China’s best shale acreage, with 3 trillion cubic metres of technically recoverable reserves, and be capable of producing at least 100 billion cubic metres per year by 2020.

The MLR drafted a new framework for the zone, covering open and fair access rights to mineral resources, financial aid, environmental protection and government regulation.

The most important aspect is a good systematic design, according to Zhang. He suggested the creation of a management committee composed of ministries, local governments and major companies to coordinate efforts to establish new systems.

The idea has encountered resistance from NOCs, smaller energy companies based in the proposed zone, and other state agencies.

"I’m not a supporter of the special zone idea, as we have set up four demonstration zones so far," said Jiang Xinmin, a deputy director at the Energy Research Institute, a National Development and Reform Commission thinktank, at an industry forum in Beijing last week. "We can just start pilot programmes within these demonstrative regions and see the results."

Uneven progress

But Zhang told Interfax the four national-level demonstration zones – Fuling, Changning-Weiyuan, Zhaotong and Yan’an – have made uneven progress so far as they have received little support and guidance from the central government in Beijing.

CNPC and Sinopec are opposed to the idea, a CNPC researcher told Interfax. A zone for piloting policies would help pave the way for a more market-oriented industry, but process would be fraught with difficulties, including NOC opposition, said the researcher.

An official with a Sichuan government-owned energy company said the zone sounded unfeasible, as CNPC and Sinopec have registered 95-99% of Sichuan as conventional oil and gas blocks – which often overlap the most promising shale acreage. The NOCs have subsequently treated the overlapping resources as their own.

The official said it would be virtually impossible to get the NOCs to relinquish the blocks, but neighbouring Chongqing was a better bet as 15-30% of blocks there are still available.

Zhang said under the MLR’s draft framework for the zone, CNPC and Sinopec will be allowed to retain blocks which are already in production, have proven reserves or are believed to have high potential. The remaining blocks will be available through a competitive process to companies, including private and foreign, said Zhang.

The Sichuan company executive said he would prefer to work with CNPC to set up another a demonstration zone on a provincial level, covering 2 million hectares of southern Sichuan. The next step would then be to fully develop the zone with CNPC.

Zhang denied that local governments were reluctant to come onboard with the zone proposal. "[They] are the most willing to do so, even more than companies and the central government."

He admitted county-level governments looking to improve local incomes have been more receptive than provincial authorities. But he warned that without the zone, Sichuan’s shale gas progress will be very limited, which will affect development on a national level.

Other experts criticised the status quo without pledging support for the special zone. The central government could do better on policymaking, such as more financial aid during the exploration phase, said Li Jianchu, deputy manager of provincial government-owned Hunan Energy Development.

The central government provides a shale gas production subsidy of RMB 0.4 ($0.06) per cubic metre but does not assist during exploration, when capital cost for resource evaluation runs high, Li told Interfax.