China's plans to unlock what could be the world's biggest shale gas reserves risk running further off track after 16 firms awarded exploration rights in the latest auction lacked one core skill - not one has drilled a gas well before.
Beijing is hoping shale gas can transform the country in the same way as the U.S. boom, though to date there has been little commercial production and a target of producing 6.5 billion cubic meters of gas by 2015 in the world's biggest energy consumer looks out of reach, according to industry experts.
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The lack of experience exploiting shale among new firms scrambling to enter the sector will make it an even bigger challenge to get at the gas, and if they fail to deliver China will struggle to reduce its dependence on expensive imports of oil, liquefied natural gas and coal.
The auction winners will have to buy in the expertise they lack, offering the prospect of lucrative contracts for specialist foreign firms such as Schlumberger or Halliburton for the "fracking" (hydraulic fracturing) technology to get at the gas.
The first shale auction two years ago was dominated by big Chinese state energy firms such as CNOOC Ltd <0883.HK> and PetroChina <601857.SS> <0857.HK>.
The second auction attracted interest from more than 100 firms, an eclectic group that included a real estate developer, a grain trader and a tobacco dealer, lured by gas subsidies and aided by easy access to funds.
The profile of the bidders reflected both the fever pitch over shale and its potential and the government's attempt to replicate the conditions that underpinned the U.S. shale revolution: competition among a myriad of independent drillers.
"They will have received very little data about the blocks, will have very little idea about what it is going to cost them to do exploration wells and no idea about development costs," said Tony Regan of Tri-Zen Consultancy in Singapore, which advises gas companies doing business in China.
"They are driven by the attraction of getting in early into what could be a huge market."
DEEPER, MORE SCATTERED
China's potential is clear. The government puts technically recoverable shale gas reserves at 25 trillion cubic meters, while the U.S. Energy Information Agency has them at 36.1 tcm, in both cases larger than U.S. reserves estimated at 24.4 tcm.
But China's shale deposits are mostly found deeper underground than in the U.S. and reserves are more scattered, making it difficult to adapt the technology that has worked in the United States to China's geology.
Big oil firms including PetroChina and Sinopec Corp <0386.HK> working on what are considered some of the best prospects are making slow progress. They had drilled more than 60 shale wells by May 2012, mostly in the southwest Sichuan basin, but PetroChina had produced only just over 11 million cubic meters in its most promising area by November.
U.S. shale production in 2011 rose to 240 billion cubic meters, nearly 30 percent of total U.S. gas output.
The task for the winning companies in the second auctions is made more difficult by the lack of potential in the acreage that was on offer, said a government oil and gas expert with direct knowledge of the auction. The 20 blocks were in 8 provinces including Sichuan, Guizhou, Henan, Hubei and Jiangxi.
"Based on the understanding of the reserve potential of these blocks, I am not optimistic," the expert said. "Very few would yield sizeable finds and even if they strike gas, it could hardly be profitable due to the high exploration cost."
The cost to drill a single shale gas well in China ranges from $5 million to $12 million - compared to the average cost per well of $2.7-$3.7 million in the United States, according to a report by law firm Norton Rose.
Shortages of water for fracking in gas basins in China where the shale is located also present formidable challenges. A U.S. shale well typically requires 8-10 million gallons of water. In China, that rises to 10-13 million gallons because of the geology, analysts say.
GUNG-HO ABOUT PROSPECTS
Among the 16 winning firms the government announced in January, six are state-run and mostly affiliated to big utility and coal firms - including Huadian Group, Shenhua Coal Group and China Coal Group. Eight are energy investment firms freshly formed under the auspice of local governments.
Two are little known private firms, including Huaying Shanxi Energy Investment Co Ltd, owned by Shanghai-listed coal miner Wintime Energy <600157.SS>, which has pledged to spend 437 million yuan ($70 million) on a 1,030 sq-km block in southwestern Guizhou province, according to Xinhua.
Lured by hopes of a gas bonanza, the prospectors pledged in the auction to spend at least $2 billion over the next three years to shore up production.
"Although many of the auctioned blocks are very complicated in terms of geology ... we also realize that Chinese gas prices are better than that of the U.S. and the demand potential much greater," said an executive at one of the winning firms, asking not to be named as he was not authorized to speak to the media.
China has held wholesale, or well-head gas prices for the last three years at about $5.20 per million British thermal units, but they are still well above U.S. benchmark gas prices at around $3.50 per mmbtu.
Firms rushing into the sector have also been attracted by Beijing's plans to free up prices for unconventional gas and subsidies.
For state-owned firms, easy access to funds from state-owned lenders also encouraged aggressive bids. A firm in the second auction bid 10 times as much as PetroChina for one block, according to industry officials.
Utility Huadian has already teamed up with U.S. oilfield service operator Schlumberger, according to Huadian's website. The website gave no details on the extent of the joint venture.
Some of the bidders teamed up with service companies to prepare for the auction, industry sources said.
The lure of multi-billion dollar drilling contracts has also prompted other U.S. firms, including Halliburton and Weatherford , to invest in Chinese counterparts.
Schlumberger bought a 20.1 percent stake in Hong Kong-listed Anton Oilfield Services Group <3337.HK> for about $80 million last year, while Halliburton formed a strategic alliance with China's SPT Energy Group Inc to provide drilling operations.
But concerns over intellectual property protection for technology means U.S. firms could limit initial deals to orders of fracturing fluids and support equipment, and that the winning firms may have to rely on small, local service companies for drilling, industry experts said.
With some new entrants appearing to be more interested in short-term speculation rather than research and development, China's shale gas revolution could face an uphill slog.
"If they all fail, it could slow down the pace of developing shale gas in China, and the government will need to depend on PetroChina and Sinopec to deliver, as they hold the best blocks," said Huang Xinhua of IHS energy consultancy.
(Additional reporting by David Stanway; Editing by Ed Davies and Simon Webb)
(This story was refiled to correct the spelling of province in the 14th paragraph to Guizhou, not Quizhou)