Renewable and Sustainable Energy Reviews 45 (2015) 235243

Contents lists available at ScienceDirect

Renewable and Sustainable Energy Reviews

journal homepage: www.elsevier.com/locate/rser

A system dynamics analysis of technology, cost and policy that affect

the market competition of shale gas in China
Wu Yunna, Chen Kaifeng, Yang Yisheng n, Feng Tiantian
School of Economics and Management, North China Electric Power University, 102206 Beijing, China

art ic l e i nf o

a b s t r a c t

Article history:
Received 23 April 2014
Received in revised form
12 November 2014
Accepted 19 January 2015
Available online 9 February 2015

In order to ease environment pressure and alleviate the scarce problem of energy, Chinese government has
begun to exploit and develop shale gas (SG) since 2009. However, the formation of competitive market is
bristled with difculties, due to its infancy, imperfect and lack of standardization. This paper rstly analyzes the
status quo of technology, policy, cost, and competition of SG industry in China. Then a system dynamics (SD)
model is built to show various trends of Chinese SG industry under different scenarios, which shows that
technology, policy and cost all have effects on competitiveness. At last, the simulations reveal that the number
of competitors in Chinese SG industry will arrive at its peak from 2019 to 2020. The corresponding
recommendations have been presented: Chinese government should pay more attention on the perfection
of laws and regulations of SG industry. And competitors should focus on increasing R&D investment.
& 2015 Elsevier Ltd. All rights reserved.

Keywords:
Shale gas
China
System dynamics model
Competition

Contents
1.
2.
3.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
System dynamics method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
System dynamics model of SG industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
3.1.
Structure analysis of competition system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
3.2.
Model assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
3.3.
Variables and parameters of SD model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
4. Case study and data collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
4.1.
Exploitation cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
4.1.1.
Cost estimation of drilling process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
4.1.2.
Cost estimation of well completion process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
4.1.3.
Cost estimation of well cementation process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
4.1.4.
Cost estimation of logging process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
4.2.
Government policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
4.3.
Competition situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
5. Simulation results analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
5.1.
Simulation software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
5.2.
Result analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
5.2.1.
Technology scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
5.2.2.
Cost scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
5.2.3.
Subsidy scenarios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
5.2.4.
Combined inuence of technology, cost and policy on market competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
6. Conclusions and suggestions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Corresponding author. Tel.: 86 13401067697.

E-mail address: 8629823yys@163.com (Y. Yisheng).

http://dx.doi.org/10.1016/j.rser.2015.01.060
1364-0321/& 2015 Elsevier Ltd. All rights reserved.

236

W. Yunna et al. / Renewable and Sustainable Energy Reviews 45 (2015) 235243

1. Introduction
As a coal-dominated energy structure country, China is suffering from serious environmental problems. It has become a
signicant energy strategy for China to develop clean energy.
Natural gas, a type of clean energy, is becoming increasingly
popular. Gas consumption increases year after year. However,
China's conventional natural gas reserves fail to meet the increasing demand of gas. Therefore, reliance on imported natural gas
poses a great energy security threat to China. More than 31.6% of
the gas consumption relied on foreign supplies according to
statistics in 2013 [1]. Energy security in China will become more
serious over time. Fortunately, China has huge reserves of shale
gas (SG) which is a type of unconventional natural gas [24]. It will
be expected to effectively alleviate above problems when SG
begins to be commercially exploited to a certain extent. Many
scholars having studied the SG industry believed that SG development is an energy revolution which will have a great inuence
on the world energy landscape [57]. Many regions around the
world like European countries, Australia and China begin to
research or exploit SG after the US.
Chinese SG industry has been in the forming stage since 2009
and SG market is easily monopolized, which is unfavorable for
technology progress, cost reduction and market competition.
Competition benets to realize efcient use of energy resources
and low extraction cost. Therefore, healthy and competitive SG
market is particularly important to China energy strategy. In fact,
SG market is affected by complex technology, cost and policy
factors in China because of deeper burial depth and more complex
geological conditions [811] and further, these factors have signicant inuence on the competition of SG market [12]. Some
scholars qualitatively listed several key factors affecting the SG
industry competition: technology, cost and policy [1319]. Hu and
Xu [15] advocated that the increase of researches on SG exploitation and government subsidy might benet SG industry development. However, the inuence mechanism between these factors
and their inuence on SG market is lack of quantitative research in
detail. This paper aims to analyze these factors affecting the
competition of SG market and corresponding inuence on competition. Qualitative and quantitative methods are applied to
ensure comprehensive and sufcient argumentation.
We try to choose a system-analysis model that can analyze
complex system to study the above issues. Estimating the inuencing mechanism in an industrial section is a complex problem due
to the presence of multiple technological limitations, feedback
processes among subsystems, and various kinds of delays. System
dynamics is a suitable approach to such a complex model. System
dynamics (SD) approach, established by Forrester [20], has been
wildly used in socio-economic studies. Many researchers developed
SD models to analyze industry in various districts all over the world
[2224]. SD also has wide application in energy eld. Feng, Chen
and Zhang developed a model to study the energy consumption
and CO2 emission trends of Beijing from 2005 to 2030 [25]. Naill
presented an SD model of gas industry dynamics in the United
States. He demonstrated technological, physical, economic and
political factors that might alter the gas industry [26]. Movilla,
Miguel and Blzquez[27] used SD to analyze the behaviors of the
photovoltaic sector in Spain and its expectations in some possible
scenarios. Ansari and Sei studied energy consumption and CO2
emission in Iranian cement industry under various production and
export scenarios based on SD model [28]. Kiani and Ali presented a
system dynamic model which considers the feedback between
supply and demand and oil revenue of the existing system in Iran
considering different sectors of the economy [29].Chyong, Nuttall
and Reiner presented an SD model of the indigenous natural gas
industry in the UK [24]. Therefore, advantages of using SD model to

analyze the inuences of complicated factors on industry competition are obvious from the published literatures mentioned above.
In conclusion, it is very important to form a healthy market in
an orderly and efcient way because of the strategic importance of
SG. Through literature comparison, we nd that SD model is a
feasible method to analyze the competition of SG industry. In this
paper, we build the SD model and analyze the inuence of
technology, cost and policy on the SG industry. The results and
conclusions will be helpful for government to formulate policies,
and for enterprises to make decisions.

2. System dynamics method

SD method was originally developed to help corporate managers to improve the understanding of industrial processes [20].
SD focuses on describing endogenous feedback structure of a
system. The word endogenous means growing from a system.
An endogenous structure generates the dynamics of a system
through the interaction of variables and actors represented in the
model [30]. It is an important method to learn and solve problems
of complex system. It emphasizes to take a view angle to treat the
research issues systematically and objectively.
Through modeling feedback structure, one can better understand dynamic complexity that can be found in situations where
the same action has different effects in the short and the long run,
and where an action has one set of consequences locally and a
different set of consequences in another part of the system. It has
been argued that real leverage in many management and economy
situations lies in understanding dynamic complexity. System
dynamics has been widely utilized to study dynamic behaviors
of various social systems, and has been applied in policy formulation and analysis both in the public and private sectors.
To be specic, the SD model mainly includes the following steps:
1) Analyzing system structure to understand elements of the
system and relationships among them. This step allows
researchers to get a clear boundary of a system and nd out
the systematic characteristics and structures macroscopically.
2) Establishing ow diagram to further describe logical structure
of the system. The modeling elements can be divided into level
variables, rate variables and auxiliary variables. They reect the
nature of the analyzed object correctly with standard symbols.
3) Constructing the equation for these variables in a ow diagram
to analyze the quantitative relationships between them clearly.
The essence of SD equations is taking a differencing treatment
towards a series of differential equations. On the one hand, it
describes the relationships between the variables in mathematical form. On the other hand, it also reects the recursive
relationships between the variables. The construction of equations makes it easy to analyze a complex system with computer
simulation.
4) Entering these ow charts and equations into computer simulation environment to simulate, debug, and examine the model
so that we can adjust control variables in the model to study
the inuences of different factors on the system.

3. System dynamics model of SG industry

3.1. Structure analysis of competition system
The exploitation of SG calls for high level of technology. When
technology barriers decline or even disappear, market competition
may become erce for the reason that more companies acquiring

W. Yunna et al. / Renewable and Sustainable Energy Reviews 45 (2015) 235243

exploitation technology will enter into this SG eld. Moreover the

complex exploit technology leads to the high cost directly. In the
initial stage of market formation, companies have limited prot
due to high cost. Market competition will grow intensied, when
the cost comes down. The reason is that more companies will
choose to enter into SG market, once these companies can gain
more prot than expected. Given SG resource belonging to Chinese
government, obtaining the exploit right is closely related with
government policy. So far, tendering and bidding meetings of SG
exploit right were held by Ministry of Land and Resources of the
People's Republic of China (MLR) in 2011 and 2012. The third time
tendering and bidding were not held in 2013 for some reasons.
The types of the bid-winning enterprises changed tremendously,
due to the changing policies. Private enterprises have been
allowed to enter into the SG industry since 2012, which means
SG market competition intensies thanking to lower barriers
to entry.
Based on the backgrounds and data above, the structure
characteristics of SG market are obtained and listed as follows:
(1) The level of technology inuences the production, cost, policy
and competition. First of all, complex technology requirements
will form barriers, which may affect the market competition.
Then, the improvement of technology can increase gas production and decrease its cost so that the prot becomes
greater and more competitors will be attracted to enter into
this industry. Furthermore, when technology lags behind,
various supportive policies would be put forward by the
government to stimulate the enterprise investment and
research behaviors. When technology reaches a relatively
advanced level, the government is likely to repeal supportive
policies.
(2) Cost affects SG industry competition. Cost plays a critical role
in enterprises' prot and the speed of capital recovery directly,
which further inuences the decision-making of enterprises.
Once the cost decreases, more enterprises will enter into SG
industry. Therefore, the cost affects the prots directly and
affects the market competition indirectly.
(3) Production has an inuence on SG industry competition.
Besides, it also determines the prot and the speed of capital
recovery. At the same time, the subsidies will depend on gas
production according to the Chinese subsidy policies. Therefore, the production affects the prots directly and affects the
market competition indirectly.
(4) Policy makes differences in the technological level and competition. The market competition is affected by policy largely
when the SG industry has not yet fully evolved. Entry and quit
policy have affected the number of industrial competitors.
Investment risk and prot margins can be uctuated by the
impact of subsidy policy and that also applies to the number of
potential competitors.
Based on the above analysis, we can build the qualitative SD
conceptual model of SG industry competition as shown in Fig. 1.
mainly reects the inuence ways of different factors on the
competition intensity. The arrows in Fig. 1 represent the inuential
relationship between two factors. The positive sign and negative
sign represent the positive and negative correlations, respectively.
The inuence mechanism of technology, cost, policy and gas
production are considered in the SD model.
3.2. Model assumption
This study makes following basic assumptions in order to
quantify the structure model and build complete system dynamics
model.

237

Fig. 1. SD conceptual model of SG industry competition.

Assumption 1. Competitive intensity is represented by both

enterprises in the industry and potential enterprises who prepare
to enter into the industry.
Assumption 2. Technological level is represented by comprehensive stock of technology which is expressed with accumulative
total investment.
Assumption 3. Cost will tend towards stability, when the stock of
technology reaches a certain level. Each extraction cost of shale
gas will decrease linearly with technology improving.
Assumption 4. Policy factors mainly include entry policy, exit
policy, R&D policy and subsidy policy.
3.3. Variables and parameters of SD model
SG competition market is a multi-stage feedback system with time
delay and nonlinear characteristics. SD model can better describe the
inuence and feedback mechanisms among multiple subjects in
complex system, so it is more suitable for analyzing SG market. The
internal subsystem of SG industry competition is analyzed in details to
build up the complete SD model. All parameters and their connotations are claimed in Table 1. Fig. 2 shows the complete SD model. The
black, blue, pink and caramel parameters are technology, cost, policy
and competition parameters respectively.
(1) Policy parameters
Policy parameters include four parts: entry policy (ETP), exit policy
(EP), R&D policy (GFR&D) and subsidy policy (SP). ETP represents a
set of random values to reect the number of enterprises that are
allowed to enter into this industry by government. Exit policy (EP)
has two kinds of situations in which the enterprises are allowed or
not allowed to exit expressed with 1 and 0 in the SD model,
respectively. EP can affect the number of competitors that exit SG
industry every year (NEC). Subsidy policy (SP), gas production rate
(GPR) and gas price (P) can directly affect enterprise's actual
income. Both government funding of R&D (IR&D) and Enterprise
R&D investment (GFR&D) inuence the stock of technological
level (ST). This paper uses the conditional statement to express
this inuence shown in the following formula:


IF THEN ELSEST o\\! X; COST  GMCn R&D=X  Y ; 0

Where X is the threshold of ST when the cost gets stable; COST

represents the cost of base period; GMC is the target cost; Y
represents stock of technology of base period.
(2) Technology and cost parameters
Technology can have a signicant impact on the cost of shale gas
development. We assume that advances in technology can
gradually lower the cost of technology development. The connections of technology and cost can be represented by the following

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W. Yunna et al. / Renewable and Sustainable Energy Reviews 45 (2015) 235243

Table 1
Parameter list of SD model of SG industry competition.

Level variables

Rate variables

Auxiliary
variables

Parameters

Connotation

Unit

ST (stock of technology)
AR (average revenue)
LCP (level of competition)
R&D (total R&D investment)
GPR (gas production rate)
CNI (competitors number in industry)
NPC (number of potential competitors)
NC (number of competitors)

Technological level of SG industry

Annual revenues
Competition intensity
R&D investment
Gas production rate
Competitors number in industry
Number of potential competitors
Number of competitors that entry SG industry every
year
Number of competitors that exit SG industry every year
Logging while drilling cost
Measuring cost
Drilling uid cost
Drilling cost
Fracturing cost
MC, DFC, DLC, FC reducing rate

(Ten thousand
(Ten thousand

(Ten thousand
(Ten thousand
(Unit/Year)
(Unit/Year)
(Unit/Year)

NEC (number of exit competitors)

LWDC (logging while drilling cost)
MC (measuring cost)
DFC (drilling uid cost)
DLC (drilling cost)
FC (fracturing cost)
MCRR, DFCRR, DLCRR, FCRR (MC, DFC, DLC, FC reducing
rate)
ACD (average cost in domestic)
CLC (completion cost)
PR (prot rate)
TC (technology conversion)
External variables IR&D (enterprise R&D investment)
GFR&D (government funding of R&D)
SP (subsidies of government)
ETP (entry policy)
EP (exit policy)
CTC (cementing cost)
PC (perforating cost)
LC (logging cost)
ODC (other drilling cost)
OC (other cost)
P (price)
GLWDC (goal of logging while drilling cost)
GMC (goal of measuring cost)
GDFC (goal of drilling uid cost)
GFC (goal of fracturing cost)

Average cost in domestic

Well completion cost
prot rate (Exclude tax)
Technology conversion
Enterprise R&D investment
Government funding of R&D
Subsidies of government
Entry policy
Quit and exit policy
Well cementation cost
Perforating cost
Logging cost
Other drilling cost
Other cost
Gas price
Goal of logging while drilling cost
Goal of measuring cost
Goal of drilling uid cost
Goal of fracturing cost

(Unit/Year)
(Ten thousand
(Ten thousand
(Ten thousand
(Ten thousand
(Ten thousand
(Ten thousand
Year)
(Ten thousand
(Ten thousand
(Ten thousand
(Ten thousand
(Ten thousand
(Ten thousand
(CNY/m3)

(Ten thousand
(Ten thousand
(Ten thousand
(Ten thousand
(Ten thousand
(CNY/m3)
(Ten thousand
(Ten thousand
(Ten thousand
(Ten thousand

CNY)
CNY/Year)
CNY/Year)
m3/Year)

CNY/Well)
CNY/Well)
CNY/Well)
CNY/Well)
CNY/Well)
CNY/Well/
CNY)
CNY/Well)
CNY)
CNY)
CNY/Year)
CNY/Year)

CNY/Year)
CNY/Year)
CNY/Year)
CNY/Year)
CNY/Year)
CNY/Year)
CNY/Year)
CNY/Year)
CNY/Year)

above parameters satisfy the following relations.

PR AR  ACD=ACD

ACD CTC CLC DLC LC MC OC

FC COSTFC FCRR

MC COSTMC  MCRR

DFC COSTDFC  DFCRR

LWDC COSTLWDC  LWDCRR

DLC DFC LWDC ODC:

In addition, this paper considers that the advanced technology

from research to application takes a certain amount of time, so a
delay function is set in the model
TC DELAY1IST; 0:5; 0:
Fig. 2. SD model of SG industry competition.

parameters: MCRR, DFCRR, DLCRR and FCRR which can inuence

MC, DFC, DLC and FC, respectively. However, the cost will not fall
without limit and it will remain stabilized around an estimate, like
GMC, GDFC, GLWDC and GFC. Each part cost will be summarized
as the total cost of the SG development (ACD). ACD and income of
enterprises (AR) affect the prot level together. Furthermore,
prots inuence enterprises to enter or exit this industry. The

(3) Competitive intensity

Competitive intensity is represented by the number of competitors in the industry (LCP) and the number of potential
competitors (NPC). The calculation formula of LCP is as follows:
LCP CNI=NPC  LCP:

10

NPC meets the probability distribution of PR, which means

different PR decides the number of NPC. Therefore, a LOCKUP
function in Vensim PLE is used to t their relationship.

W. Yunna et al. / Renewable and Sustainable Energy Reviews 45 (2015) 235243

We study this industry for the next 10 years and divide it into
three stages articially: the early stage from 2013 to 2016, the
medium stage from 2017 to 2019, the last stage from 2020 to 2023.

4. Case study and data collection

Based on the SD model above, this study collects relevant data
in China which will be as the input values of the SD model. The
data mainly includes cost estimation, government policy and
market competition.
4.1. Exploitation cost
This section states the cost estimation of China SG in 2013 and
its change trends in future [31,32]. The data comes from Sinopec
by 2013.
4.1.1. Cost estimation of drilling process
(1) Logging while drilling
Logging while drilling (LWD) technology is the dominating
technology paradigm in China. LWD is divided into low-end
product and high-end product. The cost of low-end product
and high-end product are about 3 million CNY (485 thousand US
dollars) and 15 million CNY (809 thousand US dollars), respectively. More enterprises may use the matured technology by
considering the cost because low-end LWD technology is relatively mature in China. So this model assumes that the cost of
LWD keeps stable in 3 million CNY (485 thousand US dollars).
(2) Drilling uid
Drilling uid should be prepared and be compounded according to different geological conditions. The core preparing
method has been controlled by only a few international
companies, like Halliburton, Baker Hughes and Schlumberger.
These companies sell recipes of drilling uid to exploitation
enterprises at the price of 68 million CNY (971 thousand to
1.29 million US dollars). Sinopec has been researching drilling
uid but its technologies are still not yet rened. In order to
reduce cost, one recipe of drilling uid is used in similar
geological conditions by some Chinese companies. It is
expected to reduce its cost to 2 million CNY (323 thousand
US dollars) when the core technology is developed [31].
(3) Drilling construction
The cost of drilling construction can be estimated through
analyzing the cost of drilling teams. The cost of personnel and
equipment will take a total of about 25 thousand CNY/day
(4.04 thousand US dollars/day) when the drilling teams have
no work during contract period. The cost is about 1000
2000 CNY/m (161.8323.6 US dollars/m) when drilling teams
are in working days. The vertical depth of SG in China is about
35006000 m in China, the bending length is about 1000 m
and the horizontal length is about 1500 m. The fastest speed to
drill well is about 1000 m/day. So it will take 60 days to nish
the drilling tasks including 51 working days and 9 rest days.
The cost of drilling construction is about 18.275 million CNY/
well (2.95 million US dollars/well) based on the above given
conditions. The cost of drilling construction is relatively stable,
so we assume it to be the constant in our SD model.

4.1.2. Cost estimation of well completion process

The core technologies of well completion are perforating and
fracturing. Sinopec has mastered the relative perforating technology which has reached the world-advanced level. The price of
perforating is about 2 million CNY (323 thousand US dollars).

239

China can produce the advanced large fracture devices such as

SYL3000 fracturing pump, SHS20 mixed sand device, SYQ3000
control device and auxiliary device. The cost of fracture service is
about 215 million CNY (323 thousand US dollars to 2.42 million
US dollars) at current technical level. The well completion cost of a
horizontal well requires a maximum of 17 million CNY (2.75
million US dollars). However, the total cost of well completion
can be declined to 4 million CNY (637 thousand US dollars)
because there is large compression space in the cost of fracture.
4.1.3. Cost estimation of well cementation process
Well cementation technology is already relatively mature. So
we assume it as a constant variable because of its relatively stable
cost. The raw material cost and labor cost are the main costs. It is
about 5 million CNY (809 thousand US dollars) to cement one well.
4.1.4. Cost estimation of logging process
Logging is a two-stage process: the rst process and second
process. The second stage also called digital logging. They have
different costs.
The technology of the rst logging process is also relatively
mature. Domestic cost of logging is about 160200 thousand CNY/
month (25.932.2 thousand US dollars). Logging period is about 60
days, similar to the drilling cycle. The largest cost of logging is
about 400 thousand CNY (64.7 thousand US dollars) which is
relatively stable. So this article assumes it as a constant variable.
The cost of digital logging system is about 20 million CNY (3.2
million US dollars). The cost of domestic image logging system is
about 50 million CNY (8.1 million US dollars) and the imported
one is about 100 million CNY (16.1 million US dollars). Labor and
equipment maintenance costs about 1.5 million CNY (242.7
thousand US dollars) in its whole life. This equipment can be used
about 10 years, and can measure about fty wells every year.
Therefore, the average logging cost of each well is 260 thousand
CNY (42.1 thousand US dollars), and the total logging cost of each
well is 320 thousand CNY (51.8 thousand US dollars). It is expected
to reduce its cost to 200 thousand CNY (32.3 thousand US dollars)
when this technology is developed.
4.2. Government policy
(1) Entry policy
China's SG exploration has been monopolized by state-owned
enterprises before 2012. Six state-owned enterprises are
invited to bid four blocks which own rich SG resources and
two of them won the rights. In order to attract more capital,
Chinese government allows private companies and other types
of enterprises to enter into the industry after 2012. Among
these, two private companies and eighteen state-owned companies won the blocks.
(2) Quit policy
Quit policy is a kind of method to reduce the investment risk.
However, it is not formed in Chinese SG industry. Chinese
government requires the bid-winning enterprises to continue
investing exploitation of SG according to the contract schedule
during the contract period. If the enterprise cannot complete
the tasks required by contracts, Chinese government may
recover the exploration rights, which no doubt increases
investment risk of enterprises. The United States has formed
a relatively perfect quit mechanism which creates benecial
conditions to reduce investment risk.
(3) Subsidy policy
Like coal-bed methane (CBM) subsidies policies, the SG enterprises also can receive subsidies from the central government and local government. Government subsidy is a kind of

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W. Yunna et al. / Renewable and Sustainable Energy Reviews 45 (2015) 235243

Fig. 3. Subsidies policy comparison chart of shale gas and coal bed gas.
Source: China Treasury and Energy Bureau in document [2012]847.

compensation for enterprise supported by state subsidies for

specic political, economic and social purposes. Subsidy is
mainly provided to enterprises that produce or sale products at
or below cost. The differences between central government
subsidy and local government subsidy are the subject and object
of subsidy. Central government subsidy that comes from treasury
is available nationwide. Local government subsidy just adapts
local enterprises and the subsidy comes from province treasury.
In order to elaborate subsidies, we compare SG subsidy with
coal-bed gas subsidy. The central government's subsidy of SG is
two times higher than that of CBM (shown in Fig. 3).
The CBM has been commercialized for a relatively long time,
and the local government provides more preferential subsidy. For
example, Finance Ministry of Shanxi province will offer 0.05 CNY/
m3 (0.8 cents/m3) for SG enterprise exploring in this province.
Then, CBM's comprehensive subsidy can reach 0.33 CNY/m3
(5.03 cents/m3) after being added other tax breaks.
Furthermore, Chinese government has many preferential policies for SG enterprises. For example, diversied investment is
encouraged and the joint venture company is allowed to hold
mineral rights. Moreover, the enterprises will enjoy privileged
access to land and permits. At the same time, the investment of
demonstration projects will be simplied. In addition, the development and utilization of SG may obtain some other scal policies
and taxation policies, such as accelerated depreciation.

companies were invited to bid for four blocks (Nanchuan

block, Xiangxiu Mountain block, Suiyang block and Fenggang
block) in two provinces, and these six companies are: CNPC,
CPDC, CNOOC (China National Offshore Oil Corporation), Oil
administration bureau of Yanchang, CUCMC (China United
Coal-bed Methane Corporation) and HNCMC (Henan Coalbed
Methane Corporation). Each company can bid for no more
than 2 blocks.
Though all these invited companies wish to get the superior
resources, Suiyang and Fenggang blocks in Guizhou province
received no more than three biddings. According to bidding
rules stipulate, if the number of bidder fails to exceed three
biddings, the tendering and bidding will be invalid.
In conclusion, the winning enterprises were both state-owned
enterprises which have advantages of funds, equipment,
personnel, and fracturing technologies. The CPDC got one
block at the price of 591.1 million CNY (97.2 million US dollars)
to drill eleven wells. The HNCMC got another block at the price
of 247.6 million CNY (40.7 million US dollars) to drill 10 wells.
(2) Market competition situation in 2012
Unlike the rst bidding, the second bidding selected an open
bidding mode: domestic enterprises or sino-foreign joint enterprises, which have oil and gas mineral exploration qualication,
and have registered within the territory of the People's Republic
of China with the registered capital of 300 million CNY (48.5
million US dollars) or more, can bid for SG exploration rights.
Each company can tender no more than 2 blocks.
This bidding has a total of 20 block distributions in eight regions:
Chongqing, Guizhou, Hubei, Hunan, Jiangxi, Zhejiang, Anhui, and
Henan. A total of 83 enterprises participated in the bidding and
submitted 152 copies of the tenders. Higher than the rst
bidding, there are 7.6 companies on average competing for one
block, with state-owned enterprises still playing the leading role,
and private enterprises accounting for about one-third (shown in
Figs. 4 and 5). What is different with the former bidding is that
all blocks have winning enterprises, in which there are two
private enterprises, accounting for 10%.
(3) Market competition situation in future
In order to reduce winning enterprises' risk, Chinese government
may implement the Compensated Transfer Mechanism in the
third SG bidding. It means that the government is trying to help
the enterprises to do some prophase work for reducing risk and
the bid-winning enterprises should pay the government money
for exploration cost. In details, the government will do the
preliminary seismic and drilling exploration to measure the

4.3. Competition situation

Industrial competitors, potential competitors and quitting
competitors can reect the competitive conditions in SG industry
comprehensively at the same time. Industrial competitors reect
competitive condition statically at the present stage. Potential
competitors reect the competitive condition dynamically. When
the industry shows good momentum of development, there are
more potential competitors. As a result, the increasing number of
potential competitors may cause intense competition. If the
number of quitting competitor increases, the market may have
very bearish expectations. According to this principle, we can
analyze the competitive situation of SG as follows:
(1) Market competition situation in 2011
SG exploration blocks have been selected for the rst bidding
with invited companies to attend the bidding in 2011. Six

Fig. 4. SG bidding condition comparison [http://www.mlr.gov.cn/xwdt/jrxw/

201107/t20110719_904591.htm];
[http://www.gov.cn/gzdt/2013-01/21/content_
2316805.htm].
Source: shale gas exploration right bidding results for the rst time and the second
time.

W. Yunna et al. / Renewable and Sustainable Energy Reviews 45 (2015) 235243

Fig. 5. Winning enterprises condition comparison [http://www.mlr.gov.cn/xwdt/

jrxw/201107/t20110719_904591.htm];
[http://www.gov.cn/gzdt/2013-01/21/con
tent_2316805.htm].
Source: shale gas exploration right bidding results for the rst time and the second
time.

241

Fig. 6. Total research investment.

block actual data rstly. The winning enterprises will repay the
government for the cost. Moreover, the government will remove
the restriction that enterprises have to own the minimum
registered capital of 300 million CNY (48.5 million US dollars).
5. Simulation results analysis
5.1. Simulation software
The SD model explained in the previous section has been used
to simulate SG market competition using the software of Vensim
PLE for Windows Version 5.7a for validation of results on SG
industry competition.

5.2. Result analysis

5.2.1. Technology scenarios
(1) Inuence of technology on gas production
Technological level depends on the investment of research and
development. This paper sets up three research scenarios: high
investment, standard investment and low investment. The
standard investment mode is to input more capital in the early
stage. When the technological level reaches a certain level (not
mature), the investment begins to reduce. At last, the research
input keeps stabilized in relatively low level; high investment is
to keep high investment. Then the investment is reduced until
the technology is mature; low investment is to maintain a low
investment. It deserves to be noted that Chinese energy market
is inuenced hugely by energy policy since the immature energy
market. For seizing market share and making high prot,
investment boom may appear due to a new energy policy. So
this study assumes the standard input as Z type. It has high input
in rst stage, then slowly decline and keep steady in a range. This
assumption is more objective.
R&D input is divided into two parts: the enterprises' research
investment and government's research investment, the former
focuses on techniques improvement and cost reduction, and the
latter focuses on basic theory and technology research. They have
the similar characteristics and both improve relative technology
of SG. The investment pattern is shown in Fig. 6.
R&D investment can increase the technological level, which can
improve the gas production shown in Fig. 7. But the technology
cannot have an immediate effect on the gas production, because it
needs time to apply the technology into practice. Gas production

Fig. 7. Gas production trends.

will increase to stable phase quickly under the high investment

mode; the gas production will increase to stable phase slowly
under the low investment mode. The standard mode changes
between high and low investment.
(2) Inuence of technology on cost
Technological level will improve with R&D investment increasing, and the cost will be affected by the technology improving.
Cost will come down and reach a steady level from the year 2018
very quickly under the high input mode; it will show similar
trend under the low input mode, but slower in rate. The standard
mode is only a continuum between them. The various inuence
degrees of R&D and technology on cost are shown in Fig. 8.

5.2.2. Cost scenarios

To analyze the inuence of cost on competition, this study
will discuss the trends of potential competitors from three cost
scenarios by xing other parameters: high cost, standard cost, and
low cost. The high cost is 10% higher than the standard cost, and
the low cost is 10% lower than the standard cost. Seen from Fig. 9,
the peak of NPC will appear in 2018 when the cost is dropped by
20%; in contrast, the peak of NPC will appear in 2020 if the cost is
raised by 20%; the standard is a continuum between them. At the
same time, we notice that the cost affects the competition slightly
from 2013 to 2016. The reason is that investment risk is still huge
at the early stage when the cost does not decrease greatly. It has a
little inuence on enterprises' behaviors. On the contrary, the
competition will keep stable under different cost scenarios,
because the gas production decides the prot of enterprises when

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W. Yunna et al. / Renewable and Sustainable Energy Reviews 45 (2015) 235243

Fig. 10. Inuence of various subsidies on potential competitors.

Fig. 8. Exploitation cost trends.

Fig. 11. Trends for potential competitors.

Fig. 9. Inuence of various cost on potential competitors.

the cost stably shows little reduction space at the later stage,
after 2021.
5.2.3. Subsidy scenarios
For analyzing the inuence of government subsidy policy on
competition, we also assume three scenarios of subsidy with xing
other parameters: high subsidy (0.8 CNY/m3; 12.95 cents/m3),
standard subsidy (0.4 CNY/m3; 6.47 cents/m3), low subsidy
(0.2 CNY/m3; 3.22 cents/m3), which is set on relevant policies of
coal gas and other energy. Then the result of SD model can obtain
the results, shown in Fig. 10.
The results show that different subsidy policies have slight
effect on competition from 2013 to 2017, because subsidy is related
to gas production according to Chinese subsidy policy. The subsidy
policy cannot bring more prot to enterprises as the gas production is limited at the early stage. Therefore, the subsidy at the early
stage has little effect on competition. However, when the gas
production increases, subsidy will have huge inuence on prot
and will cause erce competition. Furthermore, if the subsidy is
higher, the peak of competition will come earlier. At the later
stage, the subsidy will become relatively less than the prot.
Therefore, the impact of subsidy will be weakened again.
5.2.4. Combined inuence of technology, cost and policy on market
competition
In this paper, the indicator of NPC is used to study the market
competiveness of SG industry by reecting the number of potential competitors. We can nd that the number of competitors will
arrive at its peak from 2019 to 2020 and fall back slightly into
stable state (shown as Fig. 11). Why does this kind of phenomenon

appear? The strong correlation between NPC and GPR exists.

When the GPR reaches the stable stage, NPC will reach the peak
value. The reason is that the increase of GPR will attract more
enterprises to enter into SG industry. When the GPR is stable, the
number of enterprises will enter into a cooling-off period. Then
the NPC will keep stable when the cost and production become
steady. The number of potential competitors will peak earlier
under high input scenario, because the high input of research
investment decreases the uncertainty of technology and cost.

6. Conclusions and suggestions

The SD model has been built to study the trend of Chinese SG
market competition under different scenarios. According to the
results, we can come to the following conclusions:
(1) Technology becomes the most critical factor inuencing the
formation of Chinese SG competitive market. According to the
analysis above, shale gas mining technology inuences not
only extraction cost but also gas production. Furthermore,
extraction cost inuencing the amount of prot and gas
production inuencing the value of the subsidies determine
the living space of enterprises in Chinese SG industry.
(2) The absolute prot remains an overarching concern for all
competitors. Low extraction cost and high subsidy all will
bring an earlier peak of the competitors. The peak will appear
in 2018 brought by the former, and in 2019 by the latter. Two
reasons will account for that. Low cost means low barriers to
entry including technological barriers and capital barrier and
high gas production, which stimulates the enthusiasm of

W. Yunna et al. / Renewable and Sustainable Energy Reviews 45 (2015) 235243

competitors. High subsidy means the high value of the subsidies. Thus, more competitors are attracted to the SG industry.
(3) The peak of the competitors will appear at 2019 and 2020
according to the combined inuence. When technology, cost and
policy are all taken into consideration, the peak appears at 2019
under high input and at 2020 under standard and low input.
Based on the above conclusions, we present the following
suggestions:
(1) The number of potential competitors will arrive at the peak in
2019. Thus, Chinese government should pay more attention to the
norms and provisions of entry and exit SG industry and a perfect
market system should be established before 2019, which will
provide basic prerequisite for SG market competition.
(2) Lower mining costs will contribute to the earlier coming of
competitive situation. From 2013 to 2018, the high-input
strategy should be applied by Chinese government urgently.
That is to say, a high investment R & D is needed currently,
which will bring technological upgrading and lower
mining costs.
(3) From 2013 to 2016, the competitors need input high R&D to
overcome technical barriers. Due to the high investment, yield
equilibrium point will appear in 2019, which means achieving the
maximum subsidy prots and keeping stronger competitiveness.
(4) The competitors need to reasonably apply competition strategies. Before 2019, technological barriers are high and the
competition is weak. After 2020 the technologies will be
mature and the competition will be erce. The competitors
should take their condition into consideration, including funds
and technology, when they prepare to enter or quit.

Acknowledgments
The whole research process is funded by National Natural
Science Foundation of China (71271085), Social Science Fund of
China (12JGB044) and the Fundamental Research Funds for the
Central Universities of China.
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