Investing in Chinese Shale Gas

Brian Hicks

Written By Brian Hicks

Posted October 29, 2013

China has influence on just about every continent on the planet. It is propping up the American economy by holding a large portion of our debt while investing heavily in economically downtrodden Europe. It is increasing trade with nations throughout countries in Africa.

Chinese energy companies have numerous holdings across the Middle East, South America, and Australia.

And to top things off, China may be joining the U.S. and Canada in shale gas development – the one area where both nations have been able to beat the Chinese.

china construction sidebarBut word is spreading around the world about China’s potential in developing shale gas reserves. Canada and the United States are the only two nations on earth that are commercially producing shale gas, but countries like Argentina and China are on track to join North America as successful shale gas producers. And China would certainly be third in place; it contains 1,115 trillion cubic feet of natural gas reserves, the largest in the world.

In terms of U.S. investors, there is not much to worry about, since North America will be far ahead of China. But Chinese production could spell trouble down the road if the nation becomes a supplier of natural gas in Asia, directly competing with LNG imports coming from Russia and the United States.

But above all, Chinese domestic consumption is top priority ever since the government fostered a campaign to slash coal usage to reduce pollution. This is something natural gas supporters should get excited about, as the viability of the natural gas market will grow stronger around the world.

The problem is that China is facing a number of barriers domestically that prevent full-blown commercial development.

That is why state-run companies like Sinopec Group (NYSE: SNP) are investing in overseas shale gas, particularly in Canada.

Natural gas prices have not been at profitable levels, which is part of the reason why Sinopec is selling a number of assets in Western Canada. But this can work in the company’s favor as it looks for venture partners to help it develop acreage in the Duvernay and the Montney shales, totaling 500,000 acres.

Not much information has been given on the exact amount available for auction, but it could be tens of trillions of cubic feet, Reuters reports.

China has spent $10 billion in Canada and plans to make further investments throughout the nation. But obstacles such as low natural gas prices, lacking infrastructure, and regulations could be future barriers.

And although there is a degree of controversy within Canada about a state-owned entity getting involved in the commercial sector, China’s involvement in developing the nation’s assets is viewed as a positive, since Canada would have direct access to the Asian market, where natural gas is highly valued.

Chinese Shale Gateway

Any company that signs on board will get the benefit of forming long-term partnerships with the Chinese and having direct access to the lucrative Asian market.

Sinopec will get the necessary know-how in cutting costs and becoming more efficient in operations. And joining with other companies will help the Chinese company further enhance its domestic shale gas assets in the Sichuan Basin and elsewhere.

Although the Chinese have invested billions of dollars in shale gas projects around the world, the larger goal is to gain the necessary expertise to develop on a domestic level.

China will certainly be a formidable competitor in the world market, but the Middle Kingdom is dealing with a number of barriers that have prevented operations from happening.

China has been held back by a number of water shortages around the country and a lack of clean water available to villagers. This will have enormous implications for fracking operations, which require extensive water usage for successful commodity extraction.

Drought has also been an issue in China, with rivers drying up since the early 1990s.

And reserves in China are located deeper underground when compared to North America – something that will require expensive drilling technologies. There is also concern that fracking operations will only exacerbate tectonic plates in a country where major earthquakes have resulted in thousands of tragic deaths and destruction.

But despite the hurdles, China will be in a good position with all the help it is getting from foreign companies.

Who is Investing in China?

Big Oil companies like Chevron (NYSE: CVX), Shell (NYSE: RDS-A), and Exxon Mobil (NYSE: XOM) have not been adept at developing shale oil assets in the U.S., but a majority of their focus lies in international endeavors such as helping the Chinese develop shale gas onshore. Other foreign giants like BP (NYSE: BP), Hess (NYSE: HES), and ConocoPhillips (NYSE: COP) are all in China giving PetroChina (NYSE: PTR) and Sinopec a helping hand.

These big giants are also lending support in the South China Sea, where Eni (NYSE: E) and Anadarko Petroleum (NYSE: APC) are in business.

The Chinese government has been more accommodating to foreign companies so they can help domestic companies develop unconventional plays.

Even the larger Chinese firms do not have the investment appetite to develop shale gas assets on their own without spending billions of dollars.

And when it comes to Chinese holdings in Canada, I would count on major companies becoming interested, along with domestic energy companies in Canada looking for a gateway to the Asian market.

You’ll want to keep an eye on who gains a foothold with Sinopec in the Montney and Duvernay, since these are two of the most successful plays in Canada.

China’s domestic resources have a long way to go, but they are certainly worth following as these major companies get closer to unlocking an entirely new field of shale gas in the world.

It could certainly have massive pay-offs for companies that are able to help the Chinese government unlock its commercial potential.


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