But China may have more energyriches under its own soil than policy makers in the world'ssecond-largest economy ever dared imagine.

Justover a year ago, Beijing awakened to a technology revolution that hasunlocked massive reserves of gas trapped within shale rock formations inthe United States.

Once deemed toocostly to extract, shale gas has turned around U.S. dependence onforeign gas imports. Just a few years ago, the United States wasbuilding scores of expensive facilities to import liquefied natural gas(LNG), looking at booming long-term demand forecasts and wondering whichcountries would supply the huge volume of imports it needed.

Instead,the United States is turning import facilities into export terminals,because its shale gas reserves are estimated to be big enough to meetdomestic demand for 30 years. This is an American dream that China wantsto emulate.

"America's shale gasproduction alone has exceeded that of total Chinese gas output. Thatgives us a lot of confidence," said Zhang Dawei, deputy director of theStrategic Research Center for Oil and Gas in the Ministry of Land andResources(MLR).

China's confidencehas been bolstered by a new report of its estimated reserves of shalegas, which shows them to be, by far, the largest in the world.

TheU.S. Energy Information Agency in a report last month estimates Chinaholds 36.1 trillion cubic meters (1,275 trillion cubic feet) oftechnically recoverable shale gas reserves -- significantly higher thanthe 24.4 tcm (862 trillion cubic feet) in the United States, which hasthe second-most.

Industry estimatesin China peg shale gas resources slightly lower -- but still huge -- at26 trillion cubic meters (tcm), although they have yet to give theirown forecasts of how much of that is recoverable.

China's imminent shale rush comes at a critical point.

Itwill soon overtake the United States as the world's top energy user andis already the world's biggest coal burner. China also pumps morecarbon dioxide into the atmosphere than any other country.

Beijing'sbureaucrats thus face a daunting challenge: how to clean up its brownskies while meeting the world's fastest growing energy demand.

Naturalgas burns more cleanly than other fossil fuels and installing gas-firedpower generation is cheaper and easier than building nuclear plants.The problem is China cannot meet its rising demand for gas with itslimited reserves of conventional gas. It faces the prospect of becomingas dependent on international markets for gas as it is for oil, whereChina is the world's second-largest importer.

Butshale gas may not be as clean as advertised, according to a studyreleased last week by Cornell University in New York. This study arguesthat significant amounts of methane -- a potent greenhouse gas -- escapeinto the atmosphere during production in wells and distribution inpipelines.

Regardless, China isracing to find out how much shale gas it can exploit -- and how quicklyit can get the technology and build the infrastructure it needs to pumpit to market -- to reduce its dependence on foreign sources of gas.

AUCTION ACTION The starting gun for that race is about to fire any day now.

TheMLR said it would hold the first auction of shale gas blocks by the endof the first quarter of this year, so it is already overdue. Theministry had previously delayed the auction, initially scheduled lastNovember, to open up the bidding to more domestic companies -- injectmore competition into the process and quicken the pace of shaledevelopment.

The auction is foreight exploration blocks covering 18,000 square kilometers in fourinland provinces: southwest Sichuan, Chongqing and Guizhou, and centralHubei province.

"We are aiming formajor breakthroughs in locating the reserves in five years, and in eightyears shale gas should take a significant position in China's energymix," said Zhang at the land ministry. He talked of having shale gasaccount for one-tenth of China's total gas output by 2020.

Chinahas identified shale gas as one of the country's top targets fortechnological breakthroughs in the 2011-2015 five-year plan, which meansthat Beijing will be opening the funding faucets for shale gasresearch.

China's National EnergyAdministration is setting up a shale gas laboratory in Langfang, nearBeijing, to be financed mostly by PetroChina, and that will becomeChina's national shale gas research center, officials say.

Experts say shale, which needs intensive drilling and many wells, plays to China's strengths.

"Shalegas projects are sometimes referred to as manufacturing operations.Which countries globally are particularly good at manufacturing?" saidRobert Clarke, global head of unconventional gas research for WoodMackenzie.

"China certainly comesto the forefront of your mind -- good in controlling costs, looking atefficiencies, and continually learning from earlier mistakes."

PetroChina,which produces nearly 80 percent of China's total gas output, just lastmonth completed its first horizontal shale gas well in the Weiyuanblock of Sichuan province.

Itsparent company and China's biggest oil and gas firm, China NationalPetroleum Corporation (CNPC), said it aimed to have unconventional gas,mostly shale, account for about a fifth of total gas production by 2030.

CNPCpredicts China's overall gas production will more than triple to 300billion cubic meters by 2030 from 94 bcm in 2010. That would put shalegas output up near 60 billion bcm in 20 years, or more gas than Indiacurrently consumes.

That's quite a jump, because right now, China is pumping nothing at all from its shale gas reserves.

OBAMA'S VISIT

Theshale rush only really began in China when President Barack Obamasigned a cooperation pact on shale gas in November 2009 during a statevisit to Beijing, just weeks before the Copenhagen climate talks.Washington thought that if China could increase gas usage at the expenseof dirty coal, it would reduce the carbon footprint of the world'sbiggest greenhouse gas polluter.

U.S.firms had hoped the pact would help them leverage their technology togain rare access to China's tightly controlled oil and gas reserves.China may have hoped to acquire some of that technology to help developits fledgling shale industry.

Neither has materialized to any great extentso far. But the pact has undoubtedly helped smooth out any politicalobjections to acquisitions by cash-rich Chinese energy giants of stakesin North American shale assets. In a flurry of recent deals, they haveeffectively purchased the technology and expertise they lack back home.

China'sthird-largest oil and gas firm CNOOC struck two deals with leading U.S.shale gas player Chesapeake over the last several months, giving itaccess to drilling leases in Texas, Wyoming and Colorado.

Thedeals marked CNOOC's triumphant entry into the United States after its2005 bid for Unocal Corp was killed by strident political oppositionover the involvement of Chinese state companies in the U.S. energysector. Chevron later acquired the U.S. oil firm instead.

"Chesapeakehas accumulated abundant experience in drilling and completion invarious U.S. shale plays," CNOOC said in a statement e-mailed toReuters. "The techniques and experiences we learn from the U.S. shaleprojects will benefit our potential participation in other areas in thefuture."

PetroChina, the world'ssecond-most valuable energy company, announced in February it would buy a$5.4 billion (3.3 billion pounds) stake in Calgary-based Encana Corp'sshale gas assets. Analysts say PetroChina paid a fat premium for thatdeal. But a CNPC executive said it was all about gaining expertise forshale.

"We don't care much aboutwhether the market believes it's a good or bad price. The top priorityis gaining access to a resource and mature technology," he said. "Priceis only a secondary consideration."

U.S. companies, on the other hand, have had little luck getting their foot in China's door.

Majorslike Exxon Mobil and ConocoPhilips, and smaller independents like Hessand Newfield, are looking for opportunities but Beijing-basedinternational industry executives lamented the door was at best ajar.

Infact, ever since the failed Unocal bid, dealmaking between the world'stwo largest economies has been largely in limbo. A series of plannedacquisitions has died in the hands of bureaucrats or politicians inBeijing and Washington, and other ideas haven't seen the light of dayfor fear they will also be blocked.

The energy sector has been a case in point.

Six months after Obama's visit, Chinaand the United States set up a shale gas task force and agreed tojointly conduct a shale gas project -- assessing the Lower Liaohe basinin northeastern Liaoning province. The block is part of an aging oilbasin and fell short of U.S. expectations that it would cover a muchwider area.

While the U.S.government and companies have invited Chinese geologists for technicalworkshops and field trips, Chinese firms have been more lukewarm aboutsharing technical information, or opening up new blocks for resourcestudies, industry officials said.

China remains wary about letting foreigners prowl too much around the interior.

SECRETIVE ENERGY APPROACH

"It'sno secret China has a secretive approach to energy security ... Some inthe government have a deep mistrust of U.S. motives," said aBeijing-based diplomat who requested anonymity.

Chinalast year sentenced U.S. geologist Xue Feng to eight years in jail forleaking state secrets after he arranged the sale of an industry databaseto his then employer, Colorado-based consultancy IHS Energy.

China's notoriously vague state secrets lawsdrew international attention last year when Australian citizen Stern Huand three colleagues working for mining giant Rio Tinto were detainedfor stealing state secrets during the course of tense iron orenegotiations.

China is especially sensitive when it comes to onshore oil and gas projects, which account for most of its domestic production.

Severalrounds of onshore concessions in the 1990s attracted firms such asExxon Mobil, BP, Royal Dutch Shell and Chevron. But the companies werelargely disappointed by how little they found after spending hundreds ofmillions of dollar drilling.

RoyalDutch Shell, whose current and previous greater China Chief ExecutiveOfficers are both Malaysian Chinese, has so far won the biggest accessto China's onshore sector among international firms.

Thefirst among international majors to win an onshore gas contract innorthwest China's Changbei field in 2005, Shell is now drilling at leasttwo shale gas wells in Sichuan's Fushun block under an agreement withPetroChina.

"It's too early to saythat shale gas is a game-changer (in China) but I have greatexpectations," Shell CEO Peter Voser told Reuters last month in Beijing.

Shellis drilling 17 wells this year, which should give it a good idea aboutthe potential, he said. "If we are successful, we are aiming to spend $1billion a year over the next five years on shale gas (in China)," saidVoser, adding the firm was spending $400 million this year.

Chinais the world's second-largest oil consumer and the fifth-largestproducer. But a cap on domestic gas prices to support the domesticfertilizing sector meant gas reserves were neglected until the lastdecade, when rapid urbanization and industrial growth spurred demand forthe fuel.

Rising demand has sparked pressure to open up the upstream gas industry to smaller state-run firms or even foreign investment.

Theland ministry's Zhang, one of the officials organizing the shale gasblock auction, has repeatedly delivered the same message: a diversifiedbody of investors and an open market were key to the U.S. shale gas rushonce the technological breakthrough was made, and the same holds forChina.

"Money, technology is not aproblem, but the (Chinese) monopoly system is," Zhang told Reuters afterreturning from a tour of government agencies and shale gas companies inthe United States.

The Barnettshale deposit in Texas, he noted, attracted more than 100 individualoperators, each drilling a few wells and looking to sell to biggercompanies.

FRACKING CONTROVERSIAL

InYuanba, a green hilly county dotted with rice paddies and vegetablefarms about 500 kilometers from Sichuan province's capital of Chengdu inChina's southwest, Sinopec Corp drilled its first shale gas test welllast December.

Using a verticalexploration well, the type designed for conventional gas, it struck ashale formation about 4,100 meters deep yielding a daily gas flow of11,500 cubic meters.

It was astart. But for commercial production, shale gas needs a different typeof well -- one drilled horizontally and used to pump in torrents ofsand, water and chemicals to crack open channels in the rock for the gasto flow through.

The technique is called hydraulic fracturing,or "fracking", and it has opened up gas reserves trapped in rocks withlittle permeability -- reserves hitherto seen as too difficult and tooexpensive to exploit.

Sinopec plansto drill its first horizontal shale gas well around June in Fuling, notfar from Yuanba and in the same geological Sichuan basin -- China'smost prolific gas producing region.

Hydraulicfracking has provoked opposition from environmentalists who say theinjection of chemicals contaminates water tables, concerns that arevividly depicted in the documentary Gasland.

TheOscar-nominated film showed tap water in the homes of families livingnear drilling sites in Pennsylvania turning a foul color and catchingfire when touched with a lighter.(www.gaslandthemovie.com/).

Energycompanies say there is no evidence that fracking has contaminated watersupplies. But the U.S. Environmental Protection Agency said in March itwould begin to take a closer look at the impact of shale gas drillingon both human health and the environment.

Shale's green credentials have also been questioned.

Astudy released last week by professors at Cornell said that while shalegas burns much cleaner than coal, it also leaks more methane inproduction, whether accidentally or through releases designed to relievewell pressure.

The research, ledby Cornell University ecology professor Robert Howarth and published inthe journal Climatic Change Letters, raised howls of protest from thegas industry, which said the study used flawed data and the document waspolitical.

"Compared to coal, thefootprint of shale gas is at least 20 percent greater and perhaps morethan twice as great on the 20-year horizon ...", the study says.

Thegas industry says producers already have the means to eliminate thebulk of these emissions, and the incentive to do so -- sales of trappedmethane were worth $344 million in 2009.

CHINESE LEARN FAST

Indeed, much is yet to be learned about shale gas, especially in China,which has little expertise in interpreting shale data, a shoddyenvironmental record, and has only just begun to acquire operationalexperience with fracking.

"I have alot of difficulty understanding the shale resource ... struggling tofigure out where are the exact spaces in the rocks that trap the gas andoil," said Wei Zhihong, a shale gas project manager with Chengdu-basedSinopec South Exploration Corp, an exploration unit of number-two energyfirm Sinopec Corp.

It worries him a little because his bosses are so eager to get the latest news on their shale projects in Sichuan.

"Ina little over six months, I was called to take more than 10 trips toBeijing to update the management on shale gas," Wei said. "The company'svery top boss on upstream listened in on many of the meetings. I havethe feeling our big bosses are very keen on shale gas."

China's energy giants believe they can pick up the technology fast.

"We will develop and build our own knowledgebased on what the international companies have showed us... we willcompare that to our own gas basins and pick and choose the knowledgethat is relevant to our own geological conditions," Wei said.

The United States is home to mostly shallow, broad marine basins, while Chinahas a mix of lake, marine and continent-based structures. Thedifference in geology may initially result in a higher exploration costfor China and it will need to fine-tune existing fracking techniques.

"Thequestion remains as to whether U.S. technology can easily be replicatedin China. China's geological conditions are more complicated," saidSong Yan, a senior researcher with PetroChina.

Ittook nearly two decades for U.S. companies to perfect shale gastechnology, which requires many more wells being drilled thanconventional reservoirs and often lots of failed early wells.

"Unconventionalgas plays need hundreds, and sometimes thousands, of wells. It will beinteresting to see if management fatigue develops in large companies --are they going to continue investing in a statistical project if maybethe first 10 wells don't work?" Wood Mackenzie's Clarke said.

Chinese firms say they are undaunted by the technical hurdles.

"Youshould have confidence in Chinese companies... If many small U.S. firmscan do the job, why not big Chinese companies? They simply have nottried it before. Chinese (companies) are extremely good in emulating andimitating, they will get there very quickly," said Zhang at the landministry.

Companies may also chooseto pick up the know-how from service companies such as Baker Hughes,Halliburton and Schlumberger, probably a quicker route than undergoingthe lengthy negotiations that go with sharing equity with energycompanies, analysts said.

Schlumberger,for instance, won a contract to supply Sinopec with long-term,on-demand service on well appraisals that covers both conventional andshale gas, said Sinopec's Wei.

"Isit a huge opportunity to service companies, or is it just an area inwhich the Chinese just want to learn what they need to do and then do iton their own?" said Gavin Thompson, Beijing-based head of China gasresearch of Wood Mackenzie.

Thisshale game will largely play out in Sichuan, one of the largest and mostinaccessible provinces in China, just north of Tibet, with 87 millionpeople.

SICHUAN'S GAS FRONTIER

Sichuan province is about four times the size of Pennsylvania, the U.S. state which holds the huge Marcellus shale deposit.

Sichuanis where China's Song Dynasty people invented bamboo wells to drill forsalt about 1,000 years ago. Today, the province pumps nearly a quarterof China's total natural gas production.

Oneof China's main rice-growing provinces, Sichuan has rich water sources,sitting at the upper reaches of China's longest river, the Yangtze.Access to water is key to shale development because fracking is sowater-intensive.

"If there are anymajor breakthroughs, they should come from Sichuan," said Guo Tonglou,chief geologist of Sinopec South Exploration Company. "We've done lotsof work in the basin."

Explorers have sunk wells over 7 kms deep andmade major discoveries such as Puguang, a conventional gas reservoirwith proven reserves of 400 billion cubic meters, one of the country'slargest gas fields. Geologists believe shale deposits normally sit closeto big conventional reservoirs.

Few at Chinese firms think money will be a problem once companies prove sizeable reserves can be tapped.

"Decisions on spending come really quick nowadays if you can convince management it's a good project," said Sinopec's Wei.

The rising cost of importing gas is imparting some urgency to those decisions.

Chinais set to secure nearly a third of its gas consumption through importsby 2020, much of it from costly sources such as gas piped fromTurkmenistan and a string of long-term purchase agreements for liquefiednatural gas (LNG) from Australia,Qatar and Indonesia. The price of the gas in those contracts is indexedto oil, making them relatively expensive when oil prices are highcompared to other fuels.

A rapid rise in domestic gas reserves, boosted by shale development, would be likely to depress domestic prices and may make China think twice about those LNG deals.

PetroChina'sChief Financial Officer Zhou Mingchun said in March the company lost3.7 billion yuan in marketing 4.3 bcm of imported gas last year, mostlyfrom Central Asia, because domestic gas prices were capped lower thanimport costs.

Still, China faceshuge development costs in bringing shale gas supplies online. It onlyhas 49,000 kms of gas pipeline grids, barely a tenth of the U.S. system,and would need to spend billions of dollars to build infrastructure topump the gas to market.

Farmerssuch as Cui Jinlian, who is planting peas and eggplants by aconventional gas well near Yuanba county in Sichuan, say they've neverheard of "shale gas" -- or had any idea it could contaminate the waterthey use for cooking and farming.

ButCui is aware the gas under their land has a poisonous component --hydrogen sulphide (H2S)-- that can kill people. Gas pumped from theSichuan basin, both conventional and unconventional, is mostly sour gasthat contains H2S.

"It is no goodfor immediate use. The gas needs to be sent somewhere for processingfirst," said Cui in her musical Sichuan dialect, while resting by hersmall vegetable field. Piling up at the backyard of her simple one-storybrick house were the dried tree twigs her family uses for cooking.

Sheknew also that hydrogen sulphide leaked from an explosion at aPetroChina exploration well in 2004 in Chongqing, killing hundreds ofvillagers in their sleep.

"Shalegas is a bit controversial, it can have a negative impact if doneimproperly," said Johnny Browaeys of CH2M, a U.S. consulting firmproviding environmental and engineering services with an office inShanghai.

"It's something we needto do right from the very start," said Browaeys, a fluent mandarinspeaker who once lived in western China. "You don't want to get into areputation issue."

(Editing by Simon Webb and Bill Tarrant)