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China Joining U.S. Shale Boom

Investing in Shale Assets

Written by Swagato Chakravorty
Posted March 8, 2013 at 8:34PM

China wants to cash in on the North American shale revolution.

China National Petroleum Corp., the nation’s largest oil company, is looking to invest up to $40 billion into U.S. shale assets in an effort to join the craze. This comes hard on the heels of rival firm China Petrochemical Corp. deciding to spend $1.02 billion to buy Chesapeake Energy Corp.’s (NYSE: CHK) Oklahoma stakes just last month.

China has a good history of wanting to cash in on North American oil and gas production. Eight years back, CNOOC Ltd. (NYSE: CEO) of China tried to make a $19 billion bid for Unocal Corp., but that was blocked by U.S. courts, as Bloomberg reports. Later on, CNOOC went on to win U.S. approval for its $15.1 billion bid for Canadian company Nexen Inc. (TSX: NXY).

From Bloomberg:

“Stake participation by Chinese companies in U.S. oil fields would be welcomed,” said Will Pearson, a London-based analyst for Global Energy & Natural Resources at Eurasia Group. “Full buyouts will continue to be scrutinized and opposed.”

However, despite China’s clear strategy of investing heavily in oil and gas fields in development around the world, it may run into particularly stiff political opposition here in the U.S. Just last year, there was a major furore over Chinese flooding of the solar panel market, leading to many solar panel companies going out of business or turning dismal losses due to artificially suppressed costs on part of the Chinese firms.

Nevertheless, it is likely that the Nexen approval is an indicator of at least a few more major U.S.-China deals in the near future. PetroChina Co. (NYSE: PTR), for example, owns several stakes in Canadian energy assets and spent around $1.15 billion last December to buy shale assets from Encana Corp. (TSX: ECA).

Although China has invested heavily in oil and gas fields, it will have a much harder time gaining any real foothold in ports and LNG terminal operations, since those are much more politically sensitive. Thus far, just in the U.S., China has bought $1.52 billion in oil and natural gas field stakes. That’s nearly thrice last year’s figures for the same period.

By 2015, China National Petroleum aims to double its international production to 200 million tons annually (about 4 million barrels per day). The nation also hopes to limit all crude imports at 61 percent of the total domestic consumption by the same year.

As of now, China leads the world for rate of energy consumption, but its domestic oil and gas fields are woefully inadequate. Last year, China imported 56.4 percent of crude for domestic consumption.

Those energy deficits and a systemic lack of shale research and development infrastructure are the major reasons why China is relying so much on national government loans to invest in international oil and gas assets. However, a strategy of simply investing in U.S. oil and gas fields without trying to buy fields outright could provide China with valuable technological knowhow that would prove essential toward developing an indigenous shale development infrastructure.

However, Morgan Stanley comes out with an interesting tale of balances. The ongoing shale revolution in the U.S. could well be the bedrock upon which a domestic manufacturing renaissance will be staged. Morgan Stanley argues that the shale boom will drive a resurgence in economic activity, driving up industry production thanks to low costs and abundant fuel.

That, over the longer term, could lead to a highly self-sufficient U.S. industrial sector alongside sustainable growth. And that means U.S. manufacturing, after decades, would be on the ascent, while China’s supply dominance would be threatened. After all, right now the production of non-high-tech goods today largely stems from Chinese labor efficiencies. If the U.S. rides the shale boom to recapture that sector, then China’s biggest advantage in the world market would be directly placed at risk.

From CNBC:

"As the manufacturing renaissance takes hold in the U.S., the move down the value-added ladder in the U.S. is likely to clash with China's need to further increase the sophistication of its manufacturing base," it [Morgan Stanley] said.

In that case, China would be forced to both defend its economy against stagnation as well as continue to produce medium-term growth. Nevertheless, this is a long-view projection, and it is not likely to occur anytime soon.

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