China Is Paying Up in Push to Join The Shale-Gas Boom

HONG KONG (Dow Jones Newswires), Feb. 14, 2011

Chinese companies are paying a heavy price to participate in North America's natural-gas boom in a bet on gaining vital new technology and access to a bountiful new source of energy.

Technological advances have opened up massive new gas fields in North America, creating opportunity for Asia's energy-hungry countries. The technology taps gas trapped in rock, called shale gas. Energy consulting firm Wood Mackenzie Ltd. estimates that potential U.S. shale-gas resources total 650 trillion cubic feet. By comparison, proved U.S. gas reserves at the end of 2009 totaled 244.7 trillion cubic feet, according to the BP Statistical Review.

Asian companies are looking to tap these resources and know-how. Chinese companies have been the most aggressive to date, signing joint ventures in the U.S. and China, as well as supply agreements. PetroChina Co. said last week it will pay US $5.4 billion for a stake in Calgary-based Encana Corp.'s shale and deep-well gas assets. This follows a shale-gas deal between China's Cnooc Ltd. and U.S.-based Chesapeake Energy Corp. in January. Bankers expect similar deals this year as China continues to seek energy security and reduce its dependence on dirtier coal.

Energy analysts say state-owned Chinese companies are paying a high premium. "The deal metrics look rich in Encana's favor," research analysts at Credit Suisse said.

PetroChina's deal equates to a long-term gas price at roughly a 20% premium to the current benchmark Henry Hub gas contract futures price, said Gordon Kwan, head of regional energy research at Mirae Asset Securities (HK) Ltd.

Bankers say the price may be worth it. The deals could potentially let the Chinese buyers learn new techniques to get at hard-to-reach shale gas by explosive or hydraulic force, known as fracking.

That could help China's economy meet more of its energy needs from supplies at home. China's Strategic Research Centre for Oil and Gas has set a target of locating one trillion cubic meters of recoverable shale-gas reserves by 2020. Its biggest potential reserves are in the Ordos, Sichuan and Tarim basins.

But the deals also mark a bet by Chinese companies on how shale gas will affect world-wide energy markets.

To send gas overseas without relying on pipelines, companies cool it into a liquid and ship the liquefied natural gas, or LNG, via tanker. In preparation for the U.S. to become a major importer, many companies have invested billions of dollars in terminals that can take LNG and turn it back into a gas for commercial use.

Shale gas has changed the game. "The U.S. is gas self-sufficient for at least 40 years based on 2009 gas consumption data," said Peter O'Malley, head of resources and energy banking in the Asian-Pacific region at HSBC.

Now, many observers see a day when the U.S. could become a major gas exporter. Mr. O'Malley sees more deals made for sales of LNG from the U.S. to Asia, the world's largest LNG market, where prices are higher. He believes U.S. exports could take the place of supplies expected from expensive and complicated projects in Australia.

One example involves Houston-based Cheniere Energy Partners LP, which won regulatory approval in September that put it a step closer to building the first LNG export facility in the continental U.S. Cheniere struck a deal in November with China's ENN Energy Trading Co. to export U.S. LNG to China beginning in 2015.

China still faces significant hurdles to getting the gas out of the ground at home, such as clarifying the legal framework for contracts, transporting the gas and delineating the size of the reserves.

New York-based consulting firm Eurasia Group also notes that China's shale reserves are widely dispersed and some are in heavily populated, mountainous, or arid areas. In addition, some of China's shale reserves are older and denser in geologic terms than those found in the U.S. Existing technology may therefore not be suitable for Chinese conditions and will require adjustments, implying increased costs.

Apart from the ventures in the U.S. to learn new technology, China is also signing deals on its home turf to develop shale gas. New York-based Hess Corp. signed agreements with China Petroleum & Chemical Corp. and China's Sinochem Group last month to help develop China's shale reserves. Hess has experience in developing the Bakken Shale in North Dakota that it can use in China.

With this significant technology transfer to China, bankers think gas production in China is getting closer. HSBC's Mr. O'Malley believes the Chinese are likely getting close to having enough shale-gas know-how to develop their own reserves. "When the Chinese put that technology to use, then gas prices are going lower," he said.

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