The PRC Government formally announced today that China Petroleum & Chemical Corporation ("Sinopec") has been awarded an exploration licence for the Yu Qian Nanchuan Shale Gas block and that Henan Provincial Coal Seam Gas Development and Utilization Co Ltd ("Henan CSG") has also been awarded an exploration licence for the Yu Qian Xiangxiushan Shale Gas block. Both Sinopec and Henan CSG signed binding contracts with the Ministry of Land and Resources ("MoLR") at a signing ceremony held yesterday

Sinopec's winning bid for the Yu Qian Nanchuan block included a three year exploration budget of RMB591.1 million (approx. USD91.4 million) and proposed eleven reference and preliminary exploration wells.

Henan CSG's winning bid for the Yu Qian Xiangxiushan block included a three year exploration budget of RMB247.6 million (approx. USD38.3 million) and proposed ten reference and preliminary exploration wells.

No announcements have been made yet as to whether Sinopec or Henan CSG will team with foreign partners but given the specific technical challenges associated with Shale Gas development it is highly likely that they will partner with experienced Shale Gas operators. Sinopec was awarded one of the first Chinese Shale Gas exploration rights back in 2009. Currently, PetroChina, CNOOC, Yanchang Oil and China CBM, as well as Sinopec, are actively taking part in Shale Gas exploration drilling in China.

In October 2010, Zhang Dawei, an official from the MoLR, announced that the Government would open bidding for the Shale Gas exploration rights for six blocks and he was subsequently quoted as announcing an increase in the number of blocks to eight. However on 27 June 2011 when the Government formally opened biding only four exploration blocks were offered.

In today's announcement the MoLR said that the auction for the other two blocks, which are based in the Guizhou Province, was closed as the statutory requirements had not been fulfilled due to an insufficient number of bidders. The Government has not indicated whether it will hold another auction for the Guizhou blocks. There has been speculation that the Government had been trying to create competitive tension in order to increase the bid amounts by splitting the auction process and reducing the number of blocks awarded and in today's announcement reference was made to proposals to introduce competition into the Shale Gas sector.

The runners up for the Yu Qian Nanchuan Block were, Zhonglian Coal Seam Gas Co Ltd and PetroChina Company Limited respectively. The runners up for the Yu Qian Xiangxiushan block were Zhonglian Coal Seam Gas Co Ltd and Yanchang Petroleum and Mining Bureau respectively.

The MoLR is currently formulating policies for Shale Gas development for inclusion in the 12th Five Year Plan and both the legal regime and the resource management strategy for Shale Gas will be developed as part of this initiative.