Beijing, China - At a nondescript three-star hotel just outside's Beijing third-ring road, companies competed for an opportunity to develop a potentially vast and untapped energy source in China.
Chinese companies from across the country had gathered in the hotel's meeting rooms to bid for licences to explore for shale gas, in the second auction of its kind held by the Ministry of Land and Resources.
The auction drew 152 bids from 83 companies, with some bidding more than 1bn yuan (US$160m) for licenses in highly prospective areas.
The strong level of interest underscores the growing excitement over China's shale gas potential.
Known as hydraulic fracturing or "fracking", the process - which extracts natural gas by injecting vast amounts of water and chemicals into the earth - has stirred up controversy since it began a decade ago, mostly in the United States. Fracking has been an energy game-changer for the US, and the technique now yields about 25 percent of the country's natural gas supply.
"Shale gas offers a huge potential to not only China, but for many other countries around the world. The difficulty is the cost of getting it out and dealing with the environmental impact of that process."
- John Barnes, PricewaterhouseCoopers
But the growing popularity of fracking has been accompanied by environmental and human safety concerns: some have blamed fracking for earthquakes and water contamination.
It is estimated that China could possess as much as 50 percent more shale gas than the US.
In March, the central government estimated that 25 trillion cubic metres of potentially recoverable resources lay beneath the country - enough to sustain current gas demand for nearly 200 years.
The vast deposits present China, the world's biggest emitter of carbon dioxide, with an opportunity to curb its longstanding, unhealthy dependence on coal, and transition to cleaner-burning fuels.
"Shale gas offers a huge potential to not only China, but for many other countries around the world. The difficulty is the cost of getting it out and dealing with the environmental impact of that process," says John Barnes, who heads PricewaterhouseCoopers' sustainability and climate change services in China.
Keen to emulate the US shale gas boom that has upended North American markets, Beijing has set a target of producing 6.5 billion cubic metres per year by 2015, and up to 100 billion cubic metres by 2020.
Those targets are very ambitious, experts say, given that China's nascent industry currently produces negligible volumes and faces a daunting list of challenges.
"This is not going to be as easy as everybody thought three years ago," says Chris Faulkner, founder and chief executive of Breitling Oil and Gas. "I think it's starting to sink in that this is a huge challenge for China."
Faulkner's Texas company has helped CNOOC and Sinopec, two of China's largest state-owned oil and gas companies, conduct seismic surveys for shale gas.
Extracting shale gas was made possible by the introduction of hydraulic fracturing - the injection of large volumes of water, sand and chemicals at high pressure into the ground to shatter rock formations and release trapped gas.
"This was a technology that had been under development for some time. But in the last few years in the US, you've really seen large-scale commercial development," says Alvin Lin, China climate and energy policy director at the US-based Natural Resources Defense Council in Beijing.
The vast quantities of water needed for fracking is a major problem in China, given the country's well-documented water scarcity.
More than two-thirds of Chinese cities suffer water shortages, and the country contains only 2,100 cubic metres of renewable water resources per person, or about 28 percent of the global average, China's vice minister of water resources said in February. The US has 17,000 cubic metres per person by comparison.
The use of water-intensive fracking would strain already-stretched supplies. And the possibility of controversial fracking fluids contaminating supplies is a worrying risk in a country where 300 million people lack access to clean drinking water.
"[Officials] are aware of the reception that fracking has had in the US in terms of environmental and health concerns. It is certainly on the radar, and I think it will be perhaps one of the largest barriers to developing shale gas on a large scale in China," says Lin.
Drilling a shale well in the US typically consumes 8 to 10 million gallons of water, notes Faulkner. In China, that rises to 10 to 13 million gallons because of the country's shale geology.
Chinese shale resources have a high kerogen and clay content, which makes them less brittle. Fracturing these deposits is tough, according to Faulkner, who likens the task to "taking a fresh box of play dough and trying to frack it".
|Workers at an oilfield in Shandong province [EPA]
China's most promising shale-bearing basins lie in Sichuan province and in the remote Xinjiang region in the far west. Chinese companies have favoured Sichuan as it is already a major gas production base and has pipelines in place to pump gas to markets. But the shale there is "deep and located in mountainous terrain, so therefore difficult to get out", says Barnes.
Drilling nearly 6 kilometres below the ground to reach Sichuan's shale is only the beginning of the process. Horizontal wells must then be dug to unlock commercial flows of gas. Faulkner estimates that 7 kilometres of wells must be drilled in total to tap deposits.
"There're very few land-based rigs that can drill that deep, that far. And that equipment does not exist in China."
Fracking has been linked to small earthquakes in Canada, the US and the UK. That may present a risk in Sichuan, which was devastated by a quake in 2008. But experts say the seismic danger can be mitigated.
"I don't believe fracking causes earthquakes unless you frack over a fault. You don't want to be out there fracking anything unless you understand the geologies. They need to understand the geologies to see if there're any faults," says Faulkner.
In an effort to address their shortcomings in technology and knowhow, China's state-owned energy giants have poured billions of dollars into North America, where fracking and other cutting-edge drilling techniques were pioneered.
In July, CNOOC announced it would pay $15.1bn to acquire Canada's Nexen, which produces shale gas in British Columbia. Canadian regulators are reviewing the deal to see if the country will reap a "net benefit". If approved, it will be China's largest takeover of a foreign business.
"Some people say this is about accessing technology… there will be a bit of that," says Michael Jones, director of technology and business development at Fortune Oil, a China-focused oil and gas explorer.
"My read of it is that it's about accessing acreage. You don't spend billions of dollars to buy technology as much as to buy the acreage and resources," according to Jones, who worked at BP for 24 years.
Chinese companies hope the investment spree will help them acquire the expertise to lower development costs. A single well may cost up to $30m to develop in China, compared to around $6m in the US.
State-owned firms, however, have proved willing to shoulder losses to guarantee domestic supply. For instance, the country's top oil and gas producer, PetroChina, announced in March that it lost 21.4bn yuan (US$3.4bn) in 2011 from selling expensive imports of gas at government-set prices.
"I don't believe fracking causes earthquakes unless you frack over a fault. You don't want to be out there fracking anything unless you understand the geologies."
- Chris Faulkner, Breitling Oil and Gas
"China is in the very fortunate position in that it is very centrally controlled and is able to direct investment into projects such as shale," says Barnes.
He points out, however, the fears over digging for shale gas in a country where rapid economic growth has come at a major environmental cost.
"It's hoped that shale development, if it's done in an environmentally sound manner, will pave the way in China for cleaner energy. But we don't know if that's going to happen or not," says Barnes. "China's history is not so good at dealing with the environmental impact."
"Environmental standards for shale gas development are certainly something that China right now lacks. And so this is something we would like to help with in terms of looking at the US experience," says Lin.
Ultimately Barnes believes that China's shale gas development will be a process of learning.
"Because shale gas is quite a new thing, there isn't that much yet known about this process. We haven't got 50 years of exploration experience under anyone's belt."