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China calls to increase private investment in shale sector

29th May 2012

China, the world's largest energy user, signalled last week it wanted to draw more private investment into its energy sector as part of a plan to fast-track infrastructure investment to shore up economic growth.

China is drafting detailed guidelines to encourage private investment across industries, with a special focus on heavily state-controlled electricity, oil and natural gas

Private investors with the money and technology to unlock China's vast pools of shale and coal seam gas will need strong stomachs to brave the unpredictable, unsupported and unregulated sector.

China is drafting detailed guidelines to encourage private investment across industries, with a special focus on heavily state-controlled electricity, oil and natural gas, the official Xinhua news agency reported.

Conventional oil, gas and coal production is highly profitable in China but is dominated by state firms. Subsidies, state monopolies and government control on energy prices have made refining and power generation money-losing businesses.

Downstream segments such as gas storage, which produce steady returns, is an area that could attract private money. Gas distribution is another possibility because of strong earnings prospects, but state firms are already muscling in. Arguably, the sector in most need of new investment is unconventional energy, such as shale gas, which could potentially curb China's reliance on foreign oil and gas.

Still, without detailed rules and incentives, China may find few takers from the private sector in any area, let alone unconventional energy.

"It is not sufficient to say the energy sector will be open to private capital. The power generation industry has been open to private enterprises for more than 20 years, but who would have the guts to put money in the business?" said Lin Boqiang, director of the China Centre of Energy Economics at Xiamen University in southeast China.

"If China wants to make a material breakthrough in attracting private capital, it has to come up with some incentives to protect returns," he said.

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