Will Oil Companies Get a Piece of China's Shale?

Michael Teague |

On Wednesday Oct. 23, the US Energy Information Administration reported figures for global shale gas production for 2012 indicating that the United States accounted for 39 percent of the year’s total output, an average of 25.7 billion cubic feet per day.

The EIA’s findings would seem to be yet another confirmation of the central role of shale-based natural gas reserves in making the nation the top energy producer and exporter by the end of the decade.

All the same, the EIA’s figures also indicate that the US’s 665 trillion cubic feet of technically recoverable natural gas reserves are only the fourth largest in the world, behind number-three Algeria and number-two Argentina, with 707 and 802 trillion cubic feet respectively. The country that has the largest natgas reserves by a longshot is China with 1,115 trillion cubic feet, an impressive figure that by some estimates could be much higher.

But the country has lagged significantly in bringing those enormous reserves to the surface. In terms of total world output, China in 2012 contributed a mere 1 percent of global shale gas production. There are signs that this situation will change, however, even if that change is still some years off. For the time bein, a variety of factors have made it difficult for China’s oil industry to tap its own vast unconventional oil and gas plays.

A majority of China’s shale formations containing gas are found in Sichuan province atop some of the most active fault lines in the world. The last five years have seen 2 major seismic events resulting in the deaths in the tens of thousands. The hydraulic fracturing process that is so crucial to the extraction of shale oil and gas can aggravate these fault lines leading to unpredictable consequences.

Furthermore, shale formations in China are buried on average much further below the earth’s surface that those of US, and in terrain that is not as easy to work as the the vast flat expanses of North Dakota, Texas, and Pennsylvania, necessitating more expensive, if not experimental equipment and expertise.

At least as significant a factor is the relative lack of experience of the state-run oil companies when it comes to working with unconventional plays on and offshore. Foreign producers that wield the technology and know-how China needs to kick-start its shale boom in waiting have found themselves more welcome in recent years, as the government has been far more lenient  with the major state-run companies -Sinopec, PetroChina ($PTR), and Cnooc Ltd.($CEO)-when it comes to partnering up with foreign firms.

For the time being, the bulk of the joint work has revolved around studying different prospects throughout the country, and while foreign companies seeking an early entry into Chinese shale should not expect to be clinching any majority stakes, it is becoming increasingly clear that there will be room to do business/

The offshore company Cnooc Ltd., for example, has teamed up with numerous foreign partners in an effort to tap oil and gas reserves in the deep waters of the South China Sea. Since 2012 alone, the has initiated projects with Italian giant Eni SpA ($ENI), the UK’s BP Plc($BP), Anadarko Petroleum ($APC), ConocoPhillips ($COP), and Chevron ($CVX) in an effort to bring deep-water reserves online.

For the onshore producers Sinopec and PetroChina, the situation is much the same, with Royal Dutch Shell ($RDS.A), Chevron, ExxonMobil ($XOM), Total SA ($TOT), Eni, BP, ConoccoPhillips, and Hess Corp. ($HES) all in some way involved in helping to drill shale gas and oil. In what could be a sign of things to come, Hess Corp just recently signed the first ever production-sharing agreement between a state-run company, in this instance PetroChina, and a foreign firm, in order to develop shale-based oil.

None of this should throw any cold water on the bullishness on US shale resources. US production of shale gas in particular will remain far ahead of its competitors and for the foreseeable future. But this situation will likely change in the longer-term, and for the time being it seems as though there will be some room for foreign companies to gain a foothold.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CEO CNOOC Limited 133.92 -0.74 -0.55 84,866
HES Hess Corporation 57.92 1.81 3.23 6,113,654
CVX Chevron Corporation 113.00 -0.29 -0.26 6,167,368
ENI Enersis Americas SA ADR (Sponsored) n/a n/a n/a n/a
TOT Total S.A. 47.78 0.03 0.06 1,338,219
COP ConocoPhillips 48.12 -0.10 -0.21 5,804,976
APC Anadarko Petroleum Corporation 68.56 -0.03 -0.04 3,668,960
XOM Exxon Mobil Corporation 87.04 -0.20 -0.23 9,706,646
BP BP p.l.c. 35.48 0.09 0.25 5,205,923
GGFHF Gagfah Sa Reg Shs 16.37 0.00 0.00 0
RDSA Royal Dutch Shell Plc ADR Sponsored Repstg A Shs n/a n/a n/a 0

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