China Says Yes To Shale Gas

By Aaron Levitt | May 04, 2012 AAA

With global energy demand continuing to rise at a rapid pace and traditional sources of supply dwindling, many E&P firms have taken to unconventional assets in spades. From Arctic drilling to ultra deepwater fields, non-traditional sources of oil and natural gas are quickly becoming the norm, with Shale assets being the most widely accepted. Advances in hydraulic fracturing and drilling have allowed exploration firms to unleash a bounty of natural gas across the United States. China, as the world's biggest energy consumer, hopes that its domestic shale gas production could become a cheap and abundant fuel source in much the same way.

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Big Ambitions
The U.S. Energy Information Administration estimates that China holds around a fifth of all shale resources and has the largest technically recoverable assets on the planet. With nearly 25.08 trillion cubic meters of exploitable onshore shale-gas reserves and with total reserves estimated to be 134.42 trillion cubic meters, the potential for a shale gas renaissance in China is huge. However, that potential has yet to be fulfilled. For 2011, the Ministry of Land and Resources reported that the Asian Dragon only invested a total of 1.4 billion yuan or about $222 million in the domestic shale gas sector, and drilled only 50 wells. By comparison, the U.S. drilled about 1,300 wells a month. However, that could all be changing over the next few years.

Back in March, the ministry and other government officials released China's new shale gas development program under the nation's latest five-year economic plan. The shale gas development program targets a commercial output of 6.5 billion cubic meters per year by the end of 2015. Beijing hopes to ramp that production up to 60 billion cubic meters per year by 2020. In order to spur this forward, the central government is drafting rules that will allow it to seize acreage from energy firms that fail to invest at least 30,000 yuan or $4,747 per square kilometer annually. In addition, Beijing has pledged to prioritize land approvals, allow tax-free equipment imports and offer subsidies to E&P firms. Foreign firms will remain barred from bidding directly on shale acreage, but can invest in projects led by local explorers. Already, these partnerships are starting to form.

SEE: Oil And Gas Industry Primer

Betting on China's Shale Growth
Given the immenseness of China's shale assets as well as the fact that shale gas is now the cornerstone of its five-year energy policy, investors may want to bet on its future in the nation. The Global X China Energy ETF (ARCA:CHIE) tracks roughly 26 different Chinese energy producers, including China Shenhua Energy (OTCBB:CUAEF). With nearly 63% of its holdings in the oil and gas sector, the fund could be viewed as a broad play on the nation's shale ambitions. However, the fund hardly trades, and investors may be better off in some of the early players in the country.

Partnering with state-owned oil giant PetroChina (NYSE:PTR), Anglo-Dutch integrated major Royal Dutch Shell (NYSE:RDS.A, RDS.B) is one of the most active western energy firms delving into Chinese shale. Shell completed 11 wells in 2011 and is hoping to triple that number this year. Overall, the company plans to spend $1 billion a year over the next five years on shale gas in China.

Also getting into China's shale, is Italian major Eni (NYSE:E). The firm recently signed a memorandum of understanding with Sinopec (NYSE:SHI) to look at China's various shale assets. In turn, Sinopec would have access to some of Eni's large projects in Africa. China as a whole has been drawn to the African continent for a variety of infrastructure, mining and energy projects. Eni, who has been active in China's offshore waters for some time, would gain a valuable foothold in the nation's shale assets.

Finally, Chinese offshore specialist CNOOC (NYSE:CEO) has been quite active in buying U.S. shale assets, including a 33% stake in a Chesapeake Energy (NYSE:CHK) project. The firm hopes to apply much of the technological knowledge learned at these locations back to China. The company has recently started its first shale gas site in China and has plans to acquire more assets in North America.

SEE: Pros And Cons Of Offshore Investing

The Bottom Line
The widespread adoption of hydraulic fracturing has allowed many nations to begin developing their own domestic shale gas assets. With some of the largest reserves on the planet, China has finally begun the steps necessary to tap into its vast resources of shale gas. For investors, the shale gas revolution is just underway.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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