(EnergyAsia, July 20 2012, Friday) — Citing the country’s geological complexities, UK-based consulting group GlobalData has declared China’s plans to develop and produce shale gas as being “overly optimistic”.

In a new report, GlobalData said the industry will be challenged by the difficult geology of China’s shale gas formation, water shortages, insufficient pipeline infrastructure, state control over natural gas prices, and environmental issues despite the government’s extensive plans to support and encourage the sector’s development.

According to a March 1 report by the Ministry of Land and Resources, China has 134.4 trillion cubic metres (tcm) of onshore shale gas reserves and 25.1 tcm of exploitable shale gas reserves.

In its five-year shale gas development plan to 2015, released on March 16, 2012, the government has set a target for the industry to produce 6.5 billion cubic meters (bcm) of shale gas a year and an increase in China’s shale gas reserves. It also sets targets for an increase in local shale expertise and the development of technologies, as well as the development of a regulatory framework.

The government has promised to support the research and development (R&D) of shale gas technology, accelerate the process permitting investors to develop the country’s shale gas reserves, and implement a contract management system to control and monitor industry activities.

China will also consider introducing subsidies for shale gas projects as well as assist companies with obtaining a waiver or reduction of their license fees, priority for land use permits, and exemption of custom duties for the import of equipment and technologies unavailable in the country.

Essentially, the government aims to provide a supportive environment for huge shale gas development.

The construction of pipelines will be encouraged at shale gas reserves that are sited near existing gas pipeline networks, while the construction of small-scale liquefied natural gas (LNG) and compressed natural gas (CNG) facilities will be encouraged at shale gas reserves that are located far away from existing pipelines.

GlobalData cautioned that the development of the domestic pipeline network will take time and money, and therefore is expected to slow the pace of shale gas development.

“China aims to achieve a commercial level of shale gas production which has so far only been achieved in North America. However, Chinese shale gas companies cannot use the high performing drilling technologies used to extract shale gas in the US, as further research is needed to adapt US drilling methods to China’s very different geology,” said GlobalData.

Shale gas development also requires Chinese authorities to address the environmental issues associated with this industry. Water shortages are a major issue in China while hydraulic fracturing technology requires vast quantities of water, and has been reported tokcontaminate waterways with corrosive and toxic pollutant hydrogen sulphide, which Chinese shale gas contains in abundance.

Sophisticated drilling and gas purifying technologies, and strict emission standards would be needed to save China from the corrosion of drilling equipment and air pollution.

Lastly, while the government said it wants to encourage international co-operation and investment, it retains control over natural gas prices by keeping them artificially low.

Investors will have little incentive to develop the country’s shale reserves given the huge capital requirement and high risk.