China’s Shale Gas Industry Attracts U.S. Firms

China， the world’s biggest en- ergy user， is set to copy the U.S. success in making shale gas a cheap and plentiful new fuel source. Though still in its early days with production nowhere near the commercial stage， China’s shale-gas industry holds lucrative opportunities for U.S. companies that provide oil-field services.

They are looking to gain a foothold in China by investing in local partners before the country launches a second round of bidding later this year for its huge reserves of natural gas trapped within shale. Chinese stateowned companies were allocated shalegas blocks in the first round in June 2011.

“There’s money to be made here，”said Simon Powell， head Asian-Pacific oil and gas analyst at broker CLSA. “It’s like the gold rush—it’s the guys who sold the picks and shovels who made the money， not the miners themselves，”according to a Wall Street Journal report.

China to unlock its vast shale gas reserves

For policy planners in Beijing， shale gas could be part of the answer to reducing China’s growing dependence on imported energy. A U.S. Energy Information Administration report in April said China had 1，275 trillion cubic feet (tcf) of technically recoverable shale gas resources—by far the largest in the world， followed by the United States with 862 tcf and Argentina with 774 tcf. The fields are mostly in Sichuan or in sparsely populated regions in the interior.

The shale gas industry is still in its infancy in China， but the Chinese government has made shale gas a cornerstone of its five-year energy blueprint， aiming to boost production from no commercial output today to 60bn cubic metres yearly by 2020.

The first round of bidding on government shale gas leases， which occurred last summer， was open only to state-owned companies， and the final bids awarded parcels to just two large firms. The second round， which could come later this year， will expand participation to privately owned companies or even foreign bidders.

Beijing is implementing new policies that support the future development of China’s gas industry broadly， as well as supporting shale gas research. State-owned and provincial-owned enterprises are conducting exploration and pilot demonstrations on shale gas in China.

Meanwhile， China’s big three energy producers—CNPC， Sinopec Group and China National Offshore Oil Corp.， or Cnooc Group—have been investing in shale-gas assets in North America. Today， virtually all of the key intellectual property behind shale gas extraction lies with North American companies.

In 2010 and 2011， China National Offshore Oil Corp. (CNOOC) paid$2.3 billion for partial stakes in plays by Chesapeake Energy Corp. in Texas， Wyoming and Colorado. Earlier this year， Sinopec bought into Oklahoma City-based Devon Energy Corp.’s holdings across Louisiana， Mississippi， Colorado， Ohio and Michigan in a$2.5 billion deal. Chinese companies have also pursued investment deals in Canadian shale projects.

Some analysts have said they appear to be doing so as a way to obtain advanced technology for use at home.

However， China’s state-owned producers say these deals are mainly driven by a search for higher returns and that most expertise remains firmly owned by oil-services companies such as Schlumberger， Baker Hughes Inc. and Halliburton Co.， which are reluctant to pass on unconventional drilling knowhow to their Chinese counterparts.

The deal with Chesapeake， for example， limited the interaction of CNOOC personnel with sensitive technologies by restricting the company’s right to send workers into gas fields. The Chinese companies have agreed deliberately not to send their oil workers to American gas fields and not to participate in boardroom decisions. They have agreed to this longterm， slow， gradual approach to gaining know-how in the North American energy sector， according to an E$E report by Jenny Mandel.

The caution stems mostly from a political firestorm that broke out when， in 2005， CNOOC tried to buy Unocal Corp. in an $18.5 billion deal that was eventually withdrawn in the face of opposition from Congress. Since then， there has been a general awareness among Chinese players of the need to move slowly and avoid raising red flags.

Opportunities for U.S. companies

U.S. energy markets were fundamentally changed by the development of shale gas. In the space of several years， the country went from natural gas shortages to a point where companies are planning to export gas to Asia， and are now looking at new uses for the abundant gas， such as auto fuel. Besides， surging shale gas production has pushed gas prices down to a 10-year low.

As a result， gas is fast becoming the new fuel of choice for the US power sector: in the past 12 months， coal generation has slumped by 19 per cent while gas generation has increased by 38 per cent， according to US Department of Energy figures. A gas-fired plant produces half the CO2 emissions of a coal-fired one.

China’s ambition to copy the success of the U.S. in shale gas development brings good opportunities for American companies in the field.

Earlier in July， U.S.-based oilfield-services giant Schlumberger Ltd. bought a 20.1% stake in Hong Konglisted Anton Oilfield Services Group for about $80 million， making it the second-largest shareholder of the Chinese company， which provides a range of operational services for shale-gas developers.

With the deal， Schlumberger gains access to China’s largest energy producers—China National Petroleum Corp. and China Petrochemical Corp.， also known as Sinopec Group—both of which are Anton’s primary customers.

Schlumberger’s decision to take a minority stake better protects its intellectual property， unlike joint ventures where overseas companies may have less control over the transfer of technology that China craves.

Now that Schlumberger has moved deeper into China， more U.S. competitors may follow， analysts say. Halliburton and China’s SPT Energy Group Inc. already have a strategic alliance to provide drilling operations， while Honghua Group Ltd.， another local oil-services company， is already 14% owned by Nabors Drilling， a U.S. oil-field-equipment manufacturer.

Honghua is even in talks to form a joint venture with a leading foreign oilservices company to provide shale-gas drilling， according to its chairman， who declined to name the company.

Challenges ahead

China’s push to boost domestic energy supplies beyond traditional sources has been successful in many areas. It is the world’s biggest installer of wind turbines and the biggest builder of nuclear reactors. But the jury is still out on whether China can replicate this success in shale gas.

“China is rich in shale gas resources， which are suitable for scaled development，” said Yu Haifeng， the resource ministry’s deputy director. “But the geological conditions are complex and our exploration technology lags behind advanced countries.”

Getting shale out of the ground has proved challenging and Chinese energy executives say it will take years before China’s shale resources are developed on a large scale， according to a Financial Times report.

Dozens of exploratory shale gas wells are under way in China but initial results have been mixed. A recent shale gas blueprint issued by Beijing noted that the economic prospects for shale development were “relatively poor”， pointing out that many of the country’s shale resources were deeply buried in difficult geological terrain， such as the heavily faulted Sichuan basin.

China’s shale deposits also have more clay than the brittle “marine”shales of the US， which makes them harder to frack and less productive.

“The geology in China is very very complex，” said Chris Faulkner， chief executive of Breitling Oil and Gas， a US shale gas company that is exploring business opportunities in China.“There’s no procedure in the US that we can just lug over here and apply to this geology and expect to have the same results as the US.”

China also lacks some of the infrastructure that has made the shale revolution possible in the US， including an extensive gas pipeline network and oil workers trained in fracking techniques.

The structure of China’s oil industry， which is dominated by three large companies has been cited by some as a reason why shale development， which is risky and expensive， has been slow. To counteract this Beijing has changed the rules to allow private domestic energy companies to bid for shale gas projects. Policy makers plan eventually to liberalise natural gas prices to encourage companies to invest in shale gas.