DEVELOPMENT of China's shale gas resources, a promising sector in the nation's avowed commitment to cleaner-burning fuels, could pose some serious environmental and cost hurdles, experts said.

China, which may hold the world's biggest shale gas deposits, recently initiated the first round of shale-gas licenses, marking the start of commercial exploration for what is known as an "unconventional" energy source that is already having a transformational impact on the energy outlook of the United States.

Shale gas is tightly trapped in rock formations, thereby preventing high production rates. In order to achieve commercially viable flow rates, hydraulic fracturing is employed - a method requiring large volumes of water. In addition, chemicals to reduce viscosity are injected, and sand to hold the fractures open.

The chemicals could potentially contaminate groundwater in new shale gas developments, and there is a big risk that public opinion may be negative, according to a 2020 technology outlook report by Norwegian risk management firm Det Norske Veritas.

"Unconventional gas will be a considerable part of the energy mix, and the challenges related to water treatment will have to be solved," said Elisabeth Harstad, managing director of DNV's research and innovation unit in Shanghai.

The Ministry of Environmental Protection hasn't started studying specifically the environmental impact of shale gas because the sector's development is only in its infancy, a ministry official told Shanghai Daily.

"Shale is usually in rocks deep underground, but we're currently only looking at the environmental impact at shallow depths. There are lots of things to do," said Li Xinmin, an inspector at the ministry's pollution control department.

Within the US, shale gas areas are typically found at a depth of two to four kilometers. In China, some of the key areas in the Sichuan and Tarim basins, which have the greatest potential for shale gas extraction in China, are found at depths of four to six kilometers, thereby adding to well costs, according to Neil Beveridge, senior analyst at Sanford C. Bernstein & Co, who calls China's deeper shales a "below-ground challenge."

Lack of water

In addition, the lack of water could be a barrier for shale gas development in the Tarim, a desert region in northwest China's Xinjiang Uygur Autonomous Region, Beveridge wrote in a note on Thursday.

Water availability is part of the above-ground challenges identified by Beveridge, which also include difficult terrain, pipeline infrastructure and regulatory policies and technologies.

Still, in order to unlock the potentially huge but hard-to-extract resource, Chinese companies have made a series of overseas acquisitions in North America and Australia. The acquisitions focus on technology expertise, such as horizontal drilling and hydraulic fracturing, analysts said.

China started its first shale gas exploration tender in late June, awarding two blocks in the Sichuan Basin to China Petroleum & Chemical Corp, or Sinopec, and a Henan provincial state-owned company last week.

Though the auction was off-limits to foreign explorers, companies ranging from Royal Dutch/Shell Plc to BP Plc have been seeking partnership with Chinese state-owned energy firms to tap the potentially huge market.

Shell, which is exploring a shale gas block in southwest Sichuan Province with China National Petroleum Corp, last month signed a deal with CNPC to form a well-manufacturing joint venture to improve drilling efficiency. Sinopec has a joint program with BP to study shale gas potential in Guizhou Province.

Government officials and analysts said private-sector firms will likely be allowed to bid in later rounds but foreign companies will be barred for the near future. Their involvement will be limited to forming partnership with Chinese parties through product-sharing contracts.

China has yet to make a full assessment of its shale-gas deposits, so there are no official figures on reserves. However, a Ministry of Land and Resources official said last year the nation may hold 26 trillion cubic meters, more than 10 times its proven conventional gas deposits.

More expensive

In an April report, the US Energy Information Agency estimated China holds 36.1 trillion cubic meters of "technically recoverable" shale gas reserves - almost 50 percent higher than those estimated in the US, the next largest.

Beveridge said while the resource potential is apparent and market demand for gas is insatiable, the number of "below-the-ground" and "above-the-ground" challenges in China will mean that shale gas will be more costly to develop than in the US.

Still, tapping the domestic resources would be cheaper than importing liquefied natural gas and piped gas for China, he said.

China's shale-gas production could reach 3 billion cubic meters by 2015, accounting for less than 2 percent of its domestic natural gas output, Beveridge said. China currently doesn't produce any gas from shale rocks.

Armand Cao, a senior energy and power consultant at Frost & Sullivan, said China shouldn't rush to boost shale gas output at a time when its conventional gas production is still in its early stages.

Shale gas has been a game changer in the US, which has been seen by some as China's role model in the unconventional gas push.

But industry consultant Wood Mackenzie said in November that while it expects robust long-term growth in shale gas in China, the development in the current decade would be somewhat modest. It cited China's "unique" geological, technical and commercial challenges, which will force it to take a different course from the US.

To keep pace with aggressive demand growth in the current decade, China still has to contract for major volumes of additional piped and LNG imports, it said.

China aims to double the use of natural gas to 8 percent of its energy demand by 2015 to cut reliance on oil and coal. It imported 11.4 billion cubic meters of gas, including piped gas from central Asia and LNG, in the first five months of the year, almost doubling from a year earlier. Domestic gas production rose 6.7 percent to 43.2 billion cubic meters in the same period, official data showed.

China could establish 15-30 billion cubic meters of shale-gas production capacity by 2020. However, that will be about 10-20 percent of the production level in the US last year, Beveridge said.

Other unconventional gas resources include coal-bed methane, tight gas held between rocks, and gas hydrates.