On paper, China appears to be in a good position to replicate the North American shale gas boom, with its reserves estimated to exceed the U.S. and Canada's combined, but Chinese companies are still years away from any meaningful production.

China's complicated geology, scarce water resources and lack of foreign participation are barriers to mass commercialization of shale gas.

The Chinese government has targeted raising annual shale-gas output from practically nil now to 6.5 billion cubic meters by 2015 and as much as 100 billion cubic meters by 2020. According to Wood Mackenzie, however, it could reach barely a 10th of its 2020 target--the energy consultancy says 11 billion cubic meters is more achievable.

China's Ministry of Land and Resources has held two auctions for shale assets, offering four blocks to six state-owned companies in 2011 and 20 blocks to dozens of state- and non-state-owned Chinese firms this year. The auctions aren't likely to spark a hive of development activity, however, with China's three largest energy companies, most notably China National Petroleum Corp., owning most of the country's shale assets, thus dominating the shale-play landscape.

The U.S. Energy Information Administration says China has 1,275 trillion cubic feet, or 36 trillion cubic meters, of recoverable shale gas resources in just two basins Tarim and Sichuan, located in northwestern and southwestern China, respectively. No meaningful exploration has begun in the Tarim Basin due to its rough terrain and lack of water.

While CNPC has done some exploration work in the Sichuan Basin, it has been reluctant to prioritize shale gas due to its high costs and a lack of technology.

China needs technology and know-how to ramp up shale-gas development, but only two Western oil majors, Royal Dutch Shell RDSB.LN 0.00%PLC and Chevron Corp., CVX -0.97%are engaged in exploration for shale gas with Chinese partners. Chinese state firms, including China Petrochemical Corp., or Sinopec Group, and Cnooc Ltd., 0883.HK +0.24%are trying catch up by investing billions of dollars in U.S. shale-gas projects.