China’s Investment Incentive Strategy for Shale Gas Development

Abstract

ABSTRACT Against the backdrop of the uncertainty and irreversibility of shale gas development investment, we use the real option analysis framework to study how the government can optimally arrange an investment incentive policy for shale gas development and promote the immediate investment of enterprises under shale gas price uncertainty. In this article, we present two types of investment incentive policies for shale gas development, namely tax reductions and production subsidies. The output characteristics of shale gas development are included in the real option model. From this study, the government incentive level required to trigger the immediate investment of enterprises will rise with an increase in shale gas price volatility and the output decline rate and decrease with an increase in the initial gas recovery rate. When shale gas price volatility and the output decline rate are less than a certain level or the initial recovery rate is greater than a certain level, enterprises’ investment will be spontaneous, even without government incentives. The study reveals that shale gas development incentives for the immediate investment of enterprises need to focus not only on the uncertainty of the external environment, but also on the shale gas resource endowment characteristics in Chinese regions.