China Shale Oil Investing

Brian Hicks

Written By Brian Hicks

Posted July 25, 2013

China may soon join Canada and the United States in shale development.

China National Petroleum Corporation announced a signed agreement with Hess Corporation (NYSE: HES) for the exploration in the Malang Block of the Santanghu Basin, located in the region of Xinjiang.

china shanghaiNot many details were given on the new agreement from both companies, but Hess would assume all risks associated with exploration and production. China has opened very few blocks to foreign companies, but it is a sign that the Chinese plan on adding domestic shale to their energy economy.

Chinese companies have drilled roughly 20 wells for shale oil in the Ordos basin in effort to mimic the success of North American oil and gas production.

Chinese Shale

Countries like Poland, Uzbekistan, and Mongolia are all trying to develop shale resources on a domestic level, but China is most likely to join North America in commercial shale extraction in the near future.

According to estimates from the Energy Information Administration, China has 32 billion barrels of technically recoverable shale oil reserves. In that regard, China would only be third in place, with the U.S. coming in second, holding 58 billion barrels, and Russia with 75 billion barrels.

China could also have 1,115 trillion cubic feet of shale gas reserves, the largest technically recoverable shale gas resources in the world. The U.S. comes in fourth at 665 tcf of recoverable shale gas, but information from Advanced Resources International holds U.S. shale gas reserves at 1,161 tcf of technically recoverable shale gas.

But oil is the primary commodity that investors and energy companies around the world are watching out for in China.

If China began developing its own oil resources, this would have a great impact on world oil demand, especially OPEC exports.

The North American energy boom has caused a sharp decline in OPEC production and exporting.

Refineries in the U.S. and Canada are decreasing oil imports from the Middle East and Africa. More North American refineries are utilizing domestic light crude from places like the Bakken instead of importing the same type of light crude from West Africa, forcing Nigeria and other OPEC countries to look for alternative markets like China. And U.S. refineries prefer thick crude from Canada’s Alberta tar sands over imports from the Middle East.

But how would OPEC nations fare when China begins developing its own shale resources?

Demand for OPEC imports in China has already slowed down due to slower than anticipated growth in the Chinese economy. Chinese oil demand could increase by 365,000 barrels per day to 9.96 million in 2013, but this is 15,000 less than projected a month ago.

OPEC has already been affected several times over, with lower demand in Europe as a result of economic troubles, political and social turmoil among various OPEC nations, and the new wave of gas and crude flowing from North America.

If China begins showing some semblance of energy independence, then this could do more damage to OPEC’s production volume.

Companies Interested in China

Before the deal was made with CNPC, Hess made an earlier pact with the company’s subsidiary PetroChina (NYSE: PTR) for the exploration of oil and gas covering 200,000 acres in the Santanghu Basin.

Royal Dutch Shell (NYSE: RDS-A) and EOG Resources (NYSE: EOG) were vying for exploration in the Santanghu Basin as well, but only Hess has been able to walk away with an official agreement for shale oil.

But Shell did foster a shale gas production agreement with PetroChina in the Sichuan province. Similar to the Hess agreement, Shell will bear the cost of exploration.

China could be the next best haven for the fracking industry. But hurdles do remain, such as water shortages and lack of clean water in various provinces. Between China’s rising industrial economy and mining activities, which consumes heavy amounts of water, a question lingers as to whether or not China will have enough water to begin fracking endeavors.

17 percent of China’s water is used for its domestic coal industry, and pollution affects roughly 75 percent of Chinese rivers, 28 percent of which are not suitable for agricultural use. And many rivers in China have been drying up since the early nineties.

If fracking were to begin in the Middle Kingdom, the Chinese would need a steady source of frackable water to sustain operations, which could give way to high demand for water recycling technology.

Chinese shale development will inevitably happen, but the Chinese government is currently more focused on reducing smog emissions and managing its water supply.

But China will undoubtedly need to address water shortages to begin hydraulic fracturing, which have been so essential to the shale boom in North America.

Chinese companies including CNOOC (NYSE: CEO) and Sinopec (NYSE: SHI) have been looking to invest in Texas-based Frac Tec to learn more about the fracking industry.

There’s no getting around it; the Chinese would need to frack in order to extract shale oil and gas reserves on a mass scale, unless new drilling technology arrives in the future.


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