The Next Large Gas Play Is in … China?!

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Did you know that in Asia, natural gas can sell at multiples of the price in the United States?  It’s true.  And the price differential is one reason that U.S. oil and gas giants are crossing their fingers (lobbying) that the government will permit natural gas exports.

Interestingly, China has a storehouse of natural gas.  Taken from The Wall Street Journal:

“According to the U.S. Energy Information Administration, China has 1,275 trillion cubic feet of recoverable shale-gas resources in two basins.”

To put this in perspective, China has more recoverable gas than both the U.S. and Canada.  Combined.

But it’s actually quite ironic.  The world’s largest nation has a colossal amount of shale-gas reserves.  But it can’t get its hands on them.

There are three major issues that affect the Chinese from extracting shale gas.  Here are two of them, and I will cover the third in a moment.  First is that the nation lacks significant water resources to conduct hydraulic fracturing (fracking) for natural gas, and second is China’s complex geological structure, which must be closely studied before drilling.  But neither of these obstacles is stopping the Chinese government from dreaming big.

By 2015, the Chinese government aspires to have annual shale-gas output of 230 billion cubic feet, roughly 10% of Texas’ 2010 shale gas production.  But by 2020, the Chinese are gunning for 3.531 trillion cubic feet, or about two-thirds of the entire U.S. production in 2010.  The problem is that right now Chinese production is hardly even noteworthy. 

This leads us to the third and most important problem affecting China’s natural gas market – a lack of international involvement.  But that just changed.

Here is how the world’s largest players are making moves into the new Chinese market.

Entering A New Game

Royal Dutch Shell (NYSE: RDS-A) signed an agreement with PetroChina (NYSE: PTR) in 2009 to begin studying Chinese shale formations in China.  But the agreement kicked into high gear last March, when the two parties agreed on a formal production-sharing agreement.  Although both are awaiting final approval from the government, the move marked new ground – literally – for both companies. 

The move would give Shell a strong production source in Asia, and the move would also allow PetroChina to expand its natural gas business, which sells gas to groups like fertilizer companies, chemical firms, and municipalities.

Just getting involved is BP (NYSE: BP), who said that it is studying the agreements of its peers.  However, BP is already familiar with the Asian marketplace. 

Last year BP launched a joint venture with Exxon and ConocoPhillips (NYSE: COP) that is expected to cost up to $65 billion.  The purpose of the deal is to liquefy and export natural gas (LNG) to Asia, so long as the U.S. government gives the green light.  The move is a good one because, by 2025, some experts estimate that the world’s four largest users of LNG will be Japan, China, India, and South Korea.

Another large energy giant eyeing China is Chevron (NYSE: CVX).  According to The Wall Street Journal, Chevron “plans to drill three more wells in shale formations in China, but doesn’t expect rapid progress.”  Eventually growth could be rapid.  But there are two short-term hurdles that Chevron’s management fears.  First is the lack of significant infrastructure to support shale-gas development, and second is China’s geological condition.

The newest player to the game, however, is ConocoPhillips.  In December, ConocoPhillips signed an agreement with China Petrochemical to study the potential for shale-gas exploration in the Sichuan Basin.  Under this shale-gas pact, ConocoPhillips is expected to “drill two wells in a 3,900 square-kilometer section of the Qijiang block in China’s southwestern Sichuan province.”

Conclusion

In the short-term, these companies must determine effective ways to frack in China’s complex terrain.  If they figure out efficient methods, however, an explosion of natural gas from China would enable American firms multiply their distribution channels throughout the blossoming Asian marketplace.

Drilling for gas in China won’t be easy.  And it will suck up precious investment dollars.  But if the Chinese economy keeps growing – and if the government continues to push for increased use of natural gas – then the American drillers might just be on to something.  Something bigger than the U.S. and Canada.  Combined.


ChrisMarasco has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure