Only two Western oil majors are exploring for the fuel in the country, working with Chinese partners

The National Energy Administration announced new guidelines for shale gas on Wednesday that aim to increase output of the fuel and thus improve China's energy security.

The NEA's guidelines encourage local governments to subsidize shale gas producers based on output volume.

The government will also offer tax breaks, as well as exploration and mining rights free of administrative charges.

The agency said that China will implement a market-oriented pricing mechanism for shale gas.

Wang Xiaokun, an analyst covering natural gas at commodity consulting firm SCI International, said the guidelines represent a positive development.

But Wang added that it's unclear whether Chinese producers have the ability and technology to accelerate development.

"There will be no subsidy if they can't drill out gas," Wang said.

On the national level, the Ministry of Finance offers a subsidy of 0.4 yuan (7 US cents) per cubic meter of shale gas produced, effective from 2012 to 2015.

China National Petroleum Corp and China Petroleum and Chemical Corp are the only domestic companies with significant natural gas development experience and pipeline capacity.

"CNPC has achieved some progress in the exploration of shale gas in the Sichuan Basin, but it has been reluctant to prioritize shale gas because of a lack of technology and high costs," she said.

Only two Western oil majors - Royal Dutch Shell Plc and Chevron Corp - are exploring for shale gas in the country, working with Chinese partners.

"The next steps must involve measures to further improve technology standards ... and cooperation with foreign companies to attract investment and funding," Wang said.

Given the uncertain business prospects, most foreign investors are adopting a wait-and-see approach.

Gerald Morton, general counsel and vice-president of business development at United States-based Carrizo Oil & Gas, said that many foreign shale gas companies are being cautious, despite their readiness to invest in China's shale gas market.

"Regulations from the government are still unclear," he said. "We need to find a Chinese partner to tap into the market."

China's third auction for exploration rights for shale gas blocks is expected to open at the end of this year, at the earliest, with results to be released in 2014.

The scale will surpass the total of the previous two rounds, a source close to the National Development and Reform Commission said.