China's fledgling shale gas sector

(Adds commercial output by early Dec)

BEIJING, Dec 9 (Reuters) - China's total output of commercial shale gas by early this month stood at 143 million cu. m. through pilot drilling, mostly in the southwest Sichuan basin, official China Energy News reported on Monday.

Main production comes from Sinopec Corp's Fuling operation, where 10 horizontal wells in test production had daily output of 150,000 cu. m. per well, the paper said, citing the National Energy Administration.

The move raises hope for a breakthrough in China's shale development.

Fuling, in Chongqing municipality, is expected to pump 3.3 billion cubic metres a year towards the end of 2015, the paper said, on track for a government target of 6.5 bcm/year by 2015.

Other promising areas include Changning-Weiyuan and Zhaotong, both operated by PetroChina, and the Fushun-Yongchuan block which is being jointly developed by PetroChina and Royal-Dutch Shell, the paper said.

China, believed to hold the world's largest resource of shale gas, hopes to replicate the production success of the United States, but faces huge technological and environmental challenges due to its more complex geology and scarce water.

The government, led by the Ministry of Land & Resources, wants to broaden competition in the sector and has held two shale gas auctions so far.

The first, in July 2011, was won by state energy giant Sinopec Corp and a regional coal-seam company, but the second one was won by 16 domestic firms, mostly non-oil companies, who would need to buy in the expertise required.

Here are facts on China's shale gas sector, drawn from company statements, state media and industry officials.

TENDERS

In June 2011, the Ministry of Land Resources (MLR) issued China's first shale gas tender targeting six domestic firms.

Top (Taiwan OTC: 8419.TWO - news) state energy firm PetroChina has said it would pump 1.5 bcm of shale gas in 2015, the first such target for commercial shale gas production. Most of it would come from the Sichuan basin, in southwestern China.

In a second auction concluded last December, 16 local companies were awarded 19 blocks and pledged to spend $2 billion over the next three years, but none of these firms have experience drilling for gas.

State utility China Huadian Corp, one of the second tender winners, plans to tender later this year for engineering services. It plans to drill more than 40 wells over the next three years with a budget of 2.7 billion yuan.

RESERVES

China has 25.08 trillion cubic metres of potentially recoverable shale gas resource, says MLR, in charge of resource registrations and mining rights.

That compared to the U.S. Energy Information Agency's estimate in March last year that put China's technically recoverable shale gas reserves at 36.1 tcm, exceeding U.S. reserves of 24.4 tcm.

In March 2012, the government said the industry would establish 19 key exploration and production zones by 2015 in 13 provinces and regions including Sichuan, Chongqing, Guizhou, Hunan, Hubei, Yunnan, Anhui, Jingxi, Shaanxi, Liaoning and Xinjiang.

GEOGRAPHY

There may be shale gas in China's Sichuan basin, Erdos basin, Bohai Bay, Songliao basin, Jianghan basin, Tuha basin, Tarim basin and Junggar basin, mostly in the west and north.

The upstream regions of the Yangtze River valley, which include southern and eastern parts of Sichuan province, southeastern parts of Chongqing, northern parts of Guizhou and western parts of Hubei, are likely to contain sizeable deposits, MLR preliminary estimates show.

WELLS SUNK

Industry estimates show close to 150 wells were drilled by the end of 2013, mainly by PetroChina, Sinopec, Yanchang Petroleum and Royal Dutch Shell (Xetra: R6C1.DE - news) .

About 27 of these were horizontal wells. So far three wells have yielded a daily output of 60,000 to 130,000 cu.m. in test production, including one PetroChina well in Weiyuan block, Jiaoye HF-1 drilled by Sinopec and a third one drilled by Shell (LSE: RDSB.L - news) in Fushun block. All three are in the Sichuan basin.

PetroChina has been focusing on the Sichuan basin, geologically more similar to basins in the United States. Sinopec's drilling covers both marine and continental basins.

POLICY

China in late 2011 established shale gas as a resource independent of conventional hydrocarbons, to let in more independent players. It was followed by a policy to free up wellhead, or wholesale prices, for unconventional gas, to spur exploration.

(Compiled by Chen Aizhu; Editing by Clarence Fernandez)