Sinopec Shale Oil Investing

Brian Hicks

Written By Brian Hicks

Posted August 5, 2013

Sinopec (NYSE: SNP) is looking to make a jump for China’s vast shale resources.

The company’s new subsidiary, Sinopec Oilfield Service Company (SOSC), is currently in the process of merging its eight regional service arms and readying its 140,000-strong work force, and it has China’s full potential in its cross-hairs.

shaleChina is thought to hold the world’s largest technically recoverable shale resources, with an estimated 25 trillion cubic feet of recoverable shale gas.

If those kinds of estimates stand correct, they would make the reserves found in the U.S. look insignificant and set China up for a shale boom never seen before.

The Chinese government has already begun implementing the steps necessary to set itself up for success, starting by announcing subsidies to local shale gas producers.

That’s where Sinopec comes in – and that’s where we start taking notice. China is still just a baby in the whole shale game; not even 150 shale gas wells have been drilled thus far, and those are with limited commercial production, so it could be slow going at the onset.

But Sinopec seems eager to grow its shale segment both in China and abroad. It stands now as Asia’s top refiner, and it has an exploration department that can rival that of PetroChina (NYSE: PTR), the largest oil and gas producer in the country.

It’s got acreage in parts of the Sichuan basin where gas is king, and it has investments in U.S. shale assets with Devon Energy Corp (NYSE: DVN) and Chesapeake Energy Corp (NYSE: CHK).

What it needs now is someone to come in with direct knowledge of what Sinopec’s getting itself into. And that’s where Weatherford International (NYSE: WFT) comes into play.

Weatherford International and Sinopec

It was actually Weatherford that initiated negotiations with SOSC about a year ago, with talks becoming more advanced recently. An alliance is likely to be formed by year-end.

Weatherford’s expertise in shale oil and gas exploitation can lift SOSC into the kind of producer that will make us all take notice, integrating services like drilling, well development, and equipment manufacturing.

The joint venture would still be controlled by Sinopec, the state-owned Chinese firm, and would register capital of at least $50 million, according to Reuters.

If the partnership does succeed, it would be the largest of its kind in China.

Weatherford is currently valued at $11 billion and collected $300 million in revenue from its services in China last year. It netted $15 billion in global revenues in 2012 and will be a key asset when SOSC plans to offer its initial stock, supposedly as early as next year.

This partnership not only would propel SOSC to the head of its class in shale exploration and production, but it would also solidify Weatherford as a prominent force in China for years to come.

The talks, while in their advanced stages, are still not revealing major details, and both sides are keeping mum on the subject.

Shale Investments

Opportunities for specialists like Weatherford and competitors like Sclumberger Limited (NYSE: SLB), Halliburton (NYSE: HAL), and Baker Hughes (NYSE: BHI) are about to start opening up in a big way. We already know China has the resources down there. Now it’s time to go down and get it.

These companies have been there for decades, focusing solely on conventional oil and gas and employing next to none of the technology it’s going to take to get to the good stuff.

But they’re more than ready. It’s China’s “tight gas” that they’ll all be going after – a more complex challenge of geology, but with the benefits of hydraulic fracturing and horizontal drilling, it’s just a matter of time.

The real problem these companies are going to face will be all the people getting in the way. We all know the Chinese populous is exploding every day. It’s going to be important for these companies, in order to see a thread of success, to be able to work alongside local governments, agencies, and residents, coming to terms in a manner that can bring everybody into prosperity and good health.

Once that happens, the sky is the limit for gas and oil in China.

The wheels have already been set in motion.


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