Oil Firms Set Sights on China's Natural Gas Potential

BEIJING (THE WALL STREET JOURNAL via Dow Jones), Mar. 24, 2010

International oil companies such as Royal Dutch Shell PLC are betting they can tap unconventional sources of natural gas in China and copy their success in the U.S., where new techniques have uncovered vast new domestic supplies that are expected to reduce reliance on natural gas imports for decades to come.

"There is a big expectation building up, clearly, given the fundamental change in the domestic North American gas market," Shell Chief Executive Peter Voser told reporters Tuesday. New sources of natural gas from unconventional formations have added supplies in North America equivalent to about a century's worth of use, he said.

"China has similar geology, which could therefore have a significant potential," Mr. Voser said.

Shell on Tuesday announced plans to jointly develop and produce natural gas in western China's Sichuan basin with state-owned China National Petroleum Corp.

Under the 30-year contract, Shell and CNPC will appraise and potentially develop reservoirs of one type of unconventional gas called tight gas in an area of about 4,000 square kilometers in the Jinqiu block of central Sichuan province, according to the Shell statement. Tight gas is natural gas contained in rock that must be broken open before the gas can flow easily to production wells.

Development of unconventional gas reserves such as tight gas, shale gas or coal-bed methane gas has unlocked huge new domestic energy sources in North America, profoundly rebalancing the global energy equation. Owners of the world's biggest natural-gas fields in the Middle East and elsewhere, which had expected to supply the U.S., must now find buyers elsewhere, causing a domino effect with consequences in Russia, which is facing new competition for its natural gas.

One buyer has been China, where natural-gas demand has outpaced domestic supply from conventional gas fields. China wants to use more gas as a cleaner alternative to burning coal, the source of three-quarters of its existing power and a major pollutant. China suffered widespread gas shortages last winter.

"This is another step forward for Shell's world-wide tight gas strategy, building on our technology and production track record in China and elsewhere," said Malcolm Brinded, executive director of Shell's upstream international division. "The agreement will strengthen our partnership with CNPC in developing cleaner energy to meet China's growing needs."

This is the second deal between Shell and CNPC announced this week, underscoring growing collaboration between China's oil companies and their international competitors, as well as the strong interest in unconventional gas supplies.

On Monday, Shell and PetroChina Co., which is the Hong Kong-listed unit of CNPC, agreed to buy Australian coal-seam gas producer Arrow Energy Ltd. for $3.15 billion, pending shareholder and regulatory approval. Coal-seam gas is another form of unconventional gas supply.

Shell already has a China gas project with CNPC in Changbei, in Shaanxi province.

Commercial production in Changbei began in March 2007, supplying three billion cubic meters of gas a year to Beijing and other cities in eastern China.

Shell also signed a joint assessment agreement with PetroChina in November 2009 for shale-gas cooperation in Sichuan. Assessment work in the Fushun block that covers another area of about 4,000 square kilometers started in January this year.

Mr. Voser cautioned that it is still too early to tell just how much more gas China has. "We're just starting our exploration phase," he said.

(David Winning and Wan Xu contributed to this article.)

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