Shell, in an announcement Wednesday, said it will apply its technology and operational expertise to develop the Fushun-Yongchuan block in the Sichuan Basin. The area covers about 1,351 square miles.
"China has huge shale gas potential and we are committed to making a contribution in bringing that potential into reality," Royal Dutch Shell Chief Executive Officer Peter Voser said in a news release.
Ernst and Young says China has the largest shale reserves -- 19 percent of global resources.
Earlier this month, China's Ministry of Land and Resources estimated that China has 25 trillion cubic meters of recoverable shale gas.
As part of its latest five-year plan, China aims to produce 6.5 billion cubic meters of shale gas a year by the end of 2015.
Zhang Yuqing, head of the National Energy Administration's oil and gas department, told China Daily that if China has the necessary technology to better explore and recover shale gas, the country could produce as much as 100 billion cubic meters by 2020.
About 50 shale gas wells have been drilled in China but no commercial production has been announced.
China has invested heavily in North America's shale gas assets, giving Chinese companies a way to gain experience in the development of the gas.
Shell didn't disclose the commercial terms of the deal or the amount of the company's equity stake.
The agreement, subject to government approval, represents the first shale gas production-sharing contract signed in China, Shell said. Other foreign oil companies involved in Chinese shale gas development, such as Exxon Mobil and Chevron, are working under joint assessment agreements, Shell said.
In 2010, Shell had signed a joint assessment with CNPC for the same block to evaluate and assess the shale reserves. Last year, Shell began exploration drilling of at least three wells, with some gas shows, the Platts news service said.
"I think the terms of this latest PSC are probably unique to the block and negotiated between Shell and CNPC, in order to give Shell the confidence to commit to investing in the block. It is probably a more formal agreement in order for it to cover its costs," Platts quoted an upstream analyst based in Singapore as saying Wednesday.
China's Ministry of Land and Resources said that it would open the second or third shale-gas tenders this year but it didn't provide a timetable. The first shale-gas auction was last July.