--Clyde Russell is a Reuters market analyst. The viewsexpressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Sept 17 (Reuters) - China may boastthe world's largest potential reserves of shale gas but islikely to lose to Australia in the race to be second behind theUnited States in bringing significant production on line.
While it's clear that the United States has gained, and willcontinue to enjoy, first-mover advantage, it's also likely thatthe next shale gas producer stands to reap substantial benefits.
For China, boosting domestic natural gas output would reducedependency on expensive imports in the form of liquefied naturalgas or pipelines from Russia and central Asia.
For Australia, developing significant shale output couldunderpin a new round of LNG projects, either at existing plantsor greenfield sites, that would give the nation an unassailableglobal lead in the market for the super-chilled fuel.
But to be clear, both countries' shale gas plans are intheir infancy and face significant challenges that have largelybeen overcome already in the United States.
If shale gas were a marathon, the United States is alreadyat the half-way mark, running at a comfortable pace. Australiais a few hundred metres into the race and China has barelycrossed the starting line.
The good news is that other potential runners are nowhere inthe picture. Argentina and Mexico, which have the second- andsixth-highest potential reserves, are still in the changingrooms, as is eighth-ranked South Africa.
In those three countries, political and investment risksmean they are unlikely to start developing shale any time soon,if their governments wanted to.
Other countries, such as Britain, have yet to decide if theycan run the race, while France has declined to enter and Polandlooks like it has pulled up lame.
Australia has several advantages over China when it comes todeveloping shale gas reserves, despite its potential resource,estimated at about 437 trillion cubic feet by the EnergyInformation Administration, being about 40 percent of China's1,115 trillion cubic feet.
Chief among them is that much of the shale reserves arelocated in remote basins, away from population centres.
This means the potential opposition from farmers andenvironmentalists is reduced and shale drilling is lessdisruptive to other segments of the economy.
Even though the reserves are in remote areas, there isexisting infrastructure available as some of these areas, suchas the central Australian Cooper Basin, have long histories ofconventional gas and oil production.
This gives shale gas output the ability to flow from thecentre of the country to the east coast, where it could be fedinto existing, or expanded, LNG plants.
Three LNG plants based on coal-seam gas are underconstruction in Queensland state, but a fourth may not proceedbecause of concern over adequate gas reserves and the increasingdifficulty of winning community support for coal-seam wells onproductive farmland.
Santos, Australia's No.2 energy firm, has startedshale output on a commercial scale and plans to feed the gasinto an LNG plant it is building in partnership with Malaysia'sstate-owned Petronas.
EASY FOR GLOBAL GIANTS
Australia's other significant advantage over China is thatit is an easy place for global majors to invest and do business.
While there is red and green tape, higher labour costs andtaxes, there is also legal certainty for long-term investmentsand a tradition of foreign investment in the petroleum sector.
This can be seen by the increasing involvement of oil majorsin Australian shale plays, with the latest coming from Chevron, which invested $349 million in February to buy intoacreage.
Others that have farmed into Australian shale includeConocoPhillips, France's Total, Japan'sMitsubishi Corp and India's Bharat Petroleum.
Australia's richest person, iron ore magnate Gina Rinehart,has also entered the business, buying into Lakes Oil early this year.
In contrast, China seems to have been reluctant to allowforeign companies to make significant inroads in its shalereserves, although this may be changing.
State-owned giants PetroChina and Sinopec have made some efforts to drill shale wells, but highcosts appear to have tempered their enthusiasm.
This prompted China to award exploration licences to 16companies in late 2012 - problem was that none of them had everdrilled a shale well before.
So far, only a handful of wells have been drilled andfractured in China's most promising basin, Sichuan/Chongqing,and none have yet resulted in commercial output.
Foreign firms are becoming more involved in China, with HessCorp entering an agreement to develop a block withPetroChina in July.
Hess joins Royal Dutch Shell, Total,ConocoPhillips, Exxon Mobil, BP and Chevron intrying to get China projects underway.
But the need for joint ventures has slowed progress and mostof the majors have yet to start serious exploration programmes.
China's target of 6.5 billion cubic metres of shaleproduction by 2015 looks optimistic, and even if achieved, thiswould be less than 3 percent of what U.S. shale gas output wasin 2011.
China also faces pressure from competing land use, lack ofwater and a lack of infrastructure to take gas to majorpopulation centres.
The initial wells drilled also suggest that the geology maybe more challenging in China than in many of the U.S. basins,which will add to costs and have a negative impact on economicviability.
China's difficulties place Australia in prime spot to getsecond-mover advantage, but this doesn't mean a shale gasrevolution on the scale of the United States is likely.
Far more likely is that development will be slower andlinked to capacity to liquefy and export the gas. Also likely isthat the junior firms active in the shale plays will chasehigher value liquids first and gas second, as is happening inthe United States.
But even going for liquids will provide benefits toAustralia as industry knowledge of local shale conditionsincreases and infrastructure and investment boosts development.
BP (BP.)
