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China embraces shale-gas partners

Little is known of the precise scope of the BP talks, but they are running "smoothly", Sinopec's official newsletter reported last month. "This initiative would help China use advanced foreign concepts and technologies to speed up the development of China's potentially large shale gas reserves," the state-owned People's Daily said.

Sinopec has classified 2,000 square km in Kaili, Guizhou province, and 1,000 square km in Huangqiao, Jiangsu province, as possible areas for co-operation between the two companies. BP has not commented on the announcement.

In November, Shell signed an agreement with PetroChina to develop shale-gas resources in Sichuan province in the southwest. That followed a successful collaboration between Shell and PetroChina in the Changbei conventional gasfield in northern China.

Wider exploitation of unconventional gas reserves is regarded by the government as an important part of China's efforts to wean itself off coal as a power source and to improve its energy security. The country has said it wants natural gas to comprise 10% of its energy supply by 2020, up from around 3% in 2005. Chevron is already working with China National Petroleum Corporation to produce tight gas in China, and the government said in September it would make coal-bed methane (CBM) production more attractive through subsidies.

"The Chinese government has been more focused on its CBM strategy, but it could well provide additional support for shale gas as well," says Rhodri Thomas, unconventional-gas-service project manager at Wood Mackenzie, an Edinburgh-based energy consultancy.

Exploitation of the gas trapped in shale deposits is an obvious next step, especially in light of the upsurge in interest in the process around the world, driven largely by technological developments in the US sector, which have led to lower extraction costs. Analysts say the extent of exploitable shale-gas reserves in China is difficult to quantify. Recent estimates of the world's unconventional gas resources have suggested they could increase overall gas reserves by 60-250% (PE 11/09 p22).

The lack of home-grown Chinese expertise in the sector has opened the door to foreign firms eager to get a head start in what could become one of the world's biggest shale-gas producing countries – and one of the most lucrative markets. Both BP and Shell have forged partnerships in the North American shale sector to boost their experience.

"China tends to set ambitious targets for gas production and consumption – which it often misses – but recent deals could mark the beginning of a big wave of foreign investment and production from unconventional reservoirs. Foreign investors have been knocking on the door for a while and it seems there is finally a response," says Nikos Tsafos, a gas analyst at PFC Energy, a Washington-based consultancy.

The US government has been doing its bit to promote US companies' interests, with President Barack Obama jointly launching the US-China Shale Gas Resource Initiative with his Chinese counterpart, Hu Jintao, in November. The US Department of Energy said the initiative would use experience gained in the US to assess China's shale-gas potential and promote environmentally sustainable development of shale-gas resources, as well as promoting technical co-operation and commercial investment in China. The two governments also pledged at the same time to promote co-operation on cleaner use of coal, through development of carbon capture and other measures.

Companies entering China will be hoping they can duplicate conditions in the US, where the buoyancy of the shale-gas sector is reflected in a recent spate of large investments and mergers. In December, ExxonMobil said it wanted to buy unconventional gas specialist XTO for $30bn if it wins regulatory approval. The acquisition of Texas-based XTO would make ExxonMobil the largest natural gas producer and holder of gas reserves in the US. In another recent deal, Total entered the US shale gas market in January, by taking a 25% stake in Chesapeake Energy's Barnett Shale licences. The French major is paying $0.8bn in cash, as well as investing $1.45bn in field development over six years.

New shale-gas developments can also be expected to materialise elsewhere in the world. Russia and Europe are both regarded as having large potential reserves. Shell said in January that it plans to start exploring for shale gas in Sweden and that it could be producing in five to 10 years. However, in Europe as a whole, the greater expense of drilling and labour compared with North America makes an escalation to match the dynamism of the sector in the US unlikely, at least in the short-term (PE 12/09 p14).

South Africa also wants to get in on the act. In November, Chesapeake and its Norwegian partner Statoil announced they wanted to create a venture with South Africa's Sasol to explore for shale gas in the Karoo basin. The venture is awaiting regulatory approval, which could take up to a year.

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