Igniting China's Shale Boom

Keith Kohl

Written By Keith Kohl

Posted October 26, 2010

Editor’s note: For a more updated information from Keith Kohl on Shale Gas Stocks, click here…

I’m sure you’ve seen the recurring headlines and the trend by now involving China’s energy buying spree…

My first question for you, however, is whether or not you’ve started putting the pieces together.

When oil prices crashed, most people covered their eyes and headed for the door.

China, on the other hand, saw the chance of a lifetime. They knew we’d never see crude oil cost that cheap again.

It didn’t matter where the oil came from; China wanted it.

Last year, I can remember the Chinese government making deals just for a cut of future production.

The China National Offshore Oil Corporation (NYSE: CEO), or CNOOC for short, shelled out $1.3 billion for a stake in Angola’s offshore oil fields. Angola also happens to be Africa’s largest oil producer.

But it’s not crude that China really wants to develop… This time, their quest for energy security has led them directly to our doorstep.

And China’s next moves will create another huge opportunity for investors…

China’s energy scramble

It’s no wonder that China is scrambling to secure its future energy sources today.

And they’re going beyond the ends of the earth — regardless of how lucrative the chances appear.

Anyone else recall the fact that the Chinese are considering the possibility of mining the moon for helium-3?

Helium-3 is used in nuclear fusion research and potentially a second-generation fusion fuel. The problem is that it is found in the earth’s crust, and in very small amounts.

Sadly, China’s dreams of mining the moon sound more like a move out of Wile E. Coyote’s Acme playbook…

It’s a good thing that China won’t have to go that far, and you’ll understand why in just a second.

But first, it’s important to know why China’s current energy production just won’t cut it anymore.

China’s coal conundrum

China is the world’s largest consumer of coal. There’s no getting around it. They can’t get enough of the stuff.

Nearly 70% of the electricity in the Middle Kingdom is thanks to coal. Last week, Peabody Energy reported that China’s coal-fueled power generation increased by 19% since 2009.

And the coal situation gets worse…

While China’s coal demand is rising, coal production has been falling behind.

According to Peabody, the country’s net coal imports have drastically increased.

China’s imports through August 2010 grew 60% over last year, and Peabody expects imports to reach 140 million tonnes during 2010.

But we’re not going to have to wait five years, because China’s demand is expected to jump within a few months.

Coal doesn’t exactly have the best reputation, and China has one of the worst track records out there.

So in order to alleviate some of that addiction, they’ve been looking elsewhere…

China’s natural gas consumption only accounts for about 3% of the country’s energy demand. That’s six times less than the average of most other countries.

China is expecting to increase that share to 10% during the next decade. And now, they have their sights set on the United States to help them reach that goal.

Shale gas: China’s natural gas gamble

After watching the shale gas boom explode within the U.S., China will now be looking for similar success.

The country holds up to 30 trillion cubic meters of shale gas resources. China’s goal is for about 12% of their natural gas production to come from shale gas wells by 2020.

But it’s not as easy as it sounds. Extracting natural gas from the shale isn’t as simple as drilling straight into a formation and opening the taps…

China will have to first learn how the ins and outs of shale production — something that U.S. companies have been perfecting for years.

Their plan is already underway. In 2009, China began its first venture into developing its shale gas with the help of Royal Dutch Shell.

Last month, China Petroleum Corp (NYSE: SNP), better known as Sinopec, inked a deal with Chevron to develop shale gas targets near Guiyang City. Sinopec is hoping to increase production from unconventional sources like shale gas and coalbed methane to approximately 2.5 billion cubic meters within the next five years.

Two weeks ago, CNOOC announced a deal with Chesapeake Energy (NYSE: CHK), buying one-third of their shale assets in the prospective Eagle Ford shale play, located in South Texas.

With all this activity, where does that leave us?

Opportunity knocks

Sure, you could jump into an obvious play like CNOOC, PetroChina, or even Sinopec…


But I’m not convinced — at least, not yet…

I prefer to stick with the experience.

Remember that China’s first step toward producing its shale gas resources will be a learning experience. While rising coal prices will continue to weigh China down, we know they’ll be desperate for a way out.

And right now, nobody does it better than the U.S.

Until next time,

keith kohl

Keith Kohl
Energy and Capital

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