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.