State Giants Lured by Shale Gas Potential

(Dow Jones Newswires), June 25, 2010

China is playing catch up to Asian rivals in the race to buy into North America's shale gas sector, underlining how the world's second-largest energy consumer is waking up to the potential of a technology that could unlock a massive resource at home.

In a week when India's Reliance placed its second big bet on shale gas--a $1.36 billion deal for a 45% stake in Pioneer Natural Resources' Eagle Ford asset in the U.S.--China made a less high-profile move.

China National Petroleum Corp., China's biggest state oil company, signed an initial agreement Thursday with Canada's Encana that could lead to the companies jointly investing in the development of shale gas reserves in British Columbia.

"CNPC would invest capital to earn an interest in the assets and gain an advanced understanding of unconventional natural gas development through an ongoing sharing of technical knowledge," Encana said in a statement.

The move is significant as the International Energy Agency estimates China has reserves of 26 trillion cubic meters of shale gas, which it hasn't been able to access due to a lack of drilling know-how. Shale gas is trapped in relatively impermeable rock, and producers need to crack the tight rock formations using streams of water and chemicals.

Up to now, China has focused on persuading other countries to share this technology, arguing that a better use of its own energy resources would ease pressure on tight global markets. A Sino-U.S. Shale Gas Resource Cooperation Initiative was launched during U.S. President Barack Obama's first state visit to China last year.

China has also flirted with opening up its tightly controlled onshore gas sector to foreign companies in order to exploit its shale gas reserves. In November, Shell and CNPC's listed unit, PetroChina, signed an agreement to evaluate shale gas in southwestern China's Sichuan province.

But a reluctance by China's state companies to share a resource that could become a major growth area for output and profits is hindering talks with foreign companies for further deals.

This is creating problems--China's Ministry of Land and Resources wants annual shale gas output capacity to reach 15-30 billion cubic meters by 2020, from negligible levels now.

Boosting output would aid China's efforts to cut its reliance on crude oil and reduce greenhouse gas emissions, and could help avoid a repeat of widespread natural gas shortages earlier this year that led to the rationing of supplies to industry.

Beijing wants natural gas to account for 10% of the nation's energy mix by 2020, up from 3% in 2005. It now accounts for around 4%.

The CNPC-Encana framework agreement signals China's state companies are starting to take a more aggressive approach to acquiring expertise in shale gas development to ensure it meets these goals.

Investment from well-heeled Chinese companies in shale gas is likely to be attractive to North American producers, especially those with small market capitalizations, as it would help them to keep drilling despite restricted cashflow from low natural-gas prices.

Randy Eresman, Encana's president and chief executive officer, said a joint venture with CNPC has the potential to lower costs, reduce risks, improve project returns and tap natural gas opportunities "that would otherwise remain dormant for some time".

Further deals could be in the works.

A delegation headed by CNPC President Jiang Jiemin and Vice-President Wang Dongjin visited ConocoPhillips' Barnett shale gas development in Texas in mid-April. This triggered media speculation the Chinese company was planning an asset acquisition in the area.

Copyright (c) 2010 Dow Jones & Company, Inc.


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