HONG KONG/BEIJING (Reuters) – 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.

Until now Chinas rough mountainous terrain and lack of shale gas fracking know how has kept it out of the shale gas game, with coal far the major source of electric power.

China, the world’s largest energy user, signaled 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.

It 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.

The French oil giant, Total, has just signed a deal with Chinas Sinopec to produce shale gas in China.

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.

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.

During the uproar over the BP Deepwater Horizon Gulf of Mexico oil spill, the Obama Administration and the Energy Department formed an advisory commission on Shale 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.

It is not the first time that senior policymakers have tried to draw private capital to areas dominated by state firms.

Sources told Reuters last month that China’s reformers sensed an opportunity to push through a series of changes before President Hu Jintao and Premier Wen Jiabao step down early next year, so that view could be behind the latest push.

N) dominate the conventional oil and gas sector from production, through refining, marketing and pipelines.

PetroChina Chairman Jiang Jiemin told a media briefing last week that private firms will be welcomed as investors in the country’s third cross country West East gas pipeline, although others say such a prospect is a difficult sell.

“It’s hard for private capital to participate in this giant pipeline project because gas prices are controlled by the government, the investment is huge and it usually takes more than a decade to get the return,” said Xu Bo, a researcher with China National Petroleum Corp, the parent of PetroChina.

Beijing forced private owners to sell to the government when it nationalized the oil industry in northern Shaanxi in 2005 and the coal mining sector in Shanxi province in 2009.

From  Germany to Poland and France, from China and above all in the USA where the technique of hydraulic fracturing of shale rocks is most developed, governments and major oil companies are producing huge volumes of shale gas.

“Surprisingly, the first to show interest are those outside our vision… Many are private companies,” Li Yuxi, researcher at the strategic research centre of the Ministry of Land and Resources, said in an industry conference last week.

The US Energy Department estimates that Germany could have some 8 trillion cubic feet of technically recoverable shale gas, three years total consumption.

China has around 31 trillion cubic meters of natural gas trapped in shale, some 50% greater than the United States according to the US Department of Energy estimate.5  These are volumes to make the head of any respectable state official spin.

It aims to boost output to 60 100 bcm in 2020, a level many experts say is over ambitious given the technological, environmental and geological challenges.

China has yet to build and lay all the pipelines needed to transport shale gas, most of which is believed to be located in mountainous areas or places far from markets, or to build sufficient plants to process and store the gas.

“It seems to us that the government very badly underestimates the time and the cost. In particular, they underestimate the need to build … processing plants and pipeline infrastructure,” said Al Troner, president of Houston based Asia Pacific Energy Consulting.

Added to which, without subsidies, tax breaks, and a regulatory framework governing their interest in shale gas discoveries, private investors may stay away, analysts say.

Even in Germany some states and private oil companies are seriously looking at shale gas.

“You need to incentivize private investment and more development of the oil service sector to improve efficiency and develop technology to access and develop the shale gas,” said Scott Darling, head of Asia Oil and Gas at Barclays Capital.

Little surprise that the Deutch report called shale gas,  ”the best piece of news about energy in the last 50 years.”.

Zhou Jiping, vice chairman of PetroChina, the country’s dominant oil and gas producer, has said the state company will prioritize tight gas and coal seam gas over shale gas because the latter is more costly to extract.

The governing State Council has recently approved shale gas as an independent mineral resource, and the Ministry of Land and Resources will conduct an appraisal of shale gas resources this year to expedite discovery and development of China shale deposits.

Separately, China is switching from coal to cleaner energy sources, but with its own shale gas industry still in just the early stages, it is hungry for LNG as well.

(Additional reporting by Xu Wan and Su Dan; Editing by Emily Kaiser and Neil Fullick).

Olivia Flynn is a business journalist based in Chengdu, China. Olivia has a passion for financial markets and breaking news stories and loves writing about business news, stock market, and economic opinions that matters most to its audience. Olivia spends a lot of time discovering and researching latest financial markets and industry news stories in order to make sure the latest and greatest stories are brought to you first on BigBoardNews.com.