Shell (NYSE:RDS.A) Invests $1 Billion in China Shale Gas

Brian Hicks

Written By Brian Hicks

Posted March 29, 2013

Royal Dutch Shell Plc (NYSE: RDS.A) announced Tuesday that it will spend in excess of $1 billion a year to develop China’s unconventional gas reserves, including its shale gas deposits.

This marks the first occasion that a contract of its kind will be carried out in China.

Shell and state-owned China National Petroleum Corp. (CNPC) have been waiting for the federal government to approve the deal that was established and signed one year ago to allow the exploration, development, and production of its unconventional gas reserves.

The wheels are now in motion and the operation is set to begin in the Fushun-Yongchuan shale gas block in the Southwestern province of Sichuan, China – a 1,350 mile stretch of promisingly rich shale gas deposits, Bloomberg reports.

There are some concerns coming out of Beijing about China’s ability to exploit and operate a fully functional shale gas operation. After all, this venture will be a first for China, who is accustomed to conventional methods and doesn’t currently support the infrastructure needed for the more technical and intrusive shale gas production.

shale gas 19Regulations at this time are not set to address shale gas and the problems that accompany it; the approval process was handled much like any of its many conventional natural gas projects, but nonetheless, it signals China’s acceptance and willingness to move forward.

Unconventional gas is in an infantile stage in China, but there is a vast wealth of potential. It is estimated that China sits on 1,275 trillion cubic feet of technically recoverable shale gas reserves, according to MarketWatch – more than the U.S. and Canada combined, who have, of their own merit, already changed the outlook of the gas industry moving into the future. The U.S. holds 862 trillion cubic feet and Canada has 388 trillion feet.

China’s proven reserves are probably a more modest 107 trillion cubic feet, to be on the safe side, but it’s really too early to know for sure; many believe the nation holds more shale gas than anywhere in the world.

But what’s important now is to explore and develop what is there and to lean on experts “in order to gain necessary technical skills for developing such geologically challenging resources,” the U.S. Energy Information Administration says according to MarketWatch.

Foreign Investment

China is seeking out foreign expertise and partnering up with companies like Shell, from whom the nation can gain confidence and knowledge to rightfully harness its resources. With the technological skills of fracking, which releases the natural gas, China will be able to boost its domestic production and provide its people with a cleaner-burning fuel – an issue that has become increasingly important in the past year as the heavy use of coal has been linked to alarmingly dangerous pollution levels.

Shell and CNPC had already drilled 24 wells by November and planned an additional 14 for 2013, Bloomberg reports.

The next two years will be busy. According to China Daily, “Shell CEO Peter Voser told reporters that the company was currently preparing for a ‘significant drilling season’ for shale gas in China this year and the next.  ‘We have plans for a significant drilling season in 2013 and 2014. We are ramping up investment here (in China).'”

Bloomberg reports:

“I welcome the aggressive target of the government in the 12th five year plan and its long-term objective to make gas a significant component of its energy mix,” Voser said today. “This is the right energy source for the longer term for China given its advantage from perspectives of carbon dioxide versus coal and oil.”

China’s annual gas consumption will increase by 20 billion cubic meters every year to 230 billion by 2015 under the 12th five-year plan, the Beijing-based National Energy Administration said in a Dec. 3 report. About 250 million urban residents, or 18 percent of the population, will use gas by 2015, the report showed.

China has seen production grow in recent years, but is still largely unfamiliar with shale gas operations, and while consumption surges on, it is imperative that China develop this vital resource.

A goal of 230 billion cubic feet of produced shale gas a year by 2015 has been set by China’s Ministry of Land Resources, with an aim for at least 2,100 billion cubic feet a year by 2020, according to MarketWatch.

At the close of 2012, China had drilled roughly 80 wells for shale exploitation, a figure that would throw a wrench in its 2015 goal. But teaming up with Shell could be the right partnership to put it back on track.


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