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Shell and Hess team up with PetroChina

PetroChina is primed to form a joint venture with Shell and Hess to develop shale oil in the Santanghu basin in China’s north-western Xinjiang province

The move, follows hot on the heels of last month’s announcement that PetroChina’s parent, state-run China National Petroleum Corporation (CNPC), and Anglo-Dutch supermajor Shell, signed the first-ever production sharing contract for a shale-gas block in Sichuan province.

News of the latest talks highlights Chinese firms’ continued efforts to ramp up their capability in shale oil and gas development with the help of foreign experts, as well as the ongoing interest from international unconventional players in the world’s biggest energy consumer.

Terms of the block division and exploration-phase work targets are still under negotiation, CNPC said.

Shell and US-based Hess will shoulder the entire investment cost for the exploration phase before entering the development period, when a production sharing contract will be introduced. CNPC did not reveal any investment numbers.

The proposed pact still needs to be approved by the National Development and Reform Commission (NDRC), in line with Chinese industry policy.

This year, unconventional exploration will be a focus for all three national oil companies (NOCs) – CNPC, Sinopec and China National Offshore Oil Corporation (CNOOC).

The NOCs have ambitious plans for the production of shale-gas and oil as the country beefs up its efforts to develop the unconventional fuels in a bid to wean itself off increasing dependence on imported hydrocarbons. To this end, Beijing has tried to promote shale-gas and other forms of unconventional gas, such as coalbed methane (CBM), through supportive policies, including price subsidies.

CNPC president Zhou Jiping says the outfit plans to produce 1 billion cubic metres (cm) of shale gas by 2015. China aims to pump 6.5 billion cm per year of shale gas by 2015. Sinopec has said the country’s expansion in gas output will largely come from unconventional sources, such as shale gas and tight gas, with the NOC’s yearly production expected to hit 2 billion cm by 2015.

Global oil companies, including Shell, Chevron and BP, have been working with the state-run Chinese firms to develop local shale-gas reserves, although none of these projects has yet produced commercial quantities of gas.

The quest for expertise in unconventional-gas extraction has also driven Chinese oil majors overseas with Sinopec and CNOOC spending billions of dollars last year investing in unconventional assets abroad. CNPC has been much less aggressive in seeking technological expertise, considered essential to unlocking China’s shale potential, through overseas acquisitions. Instead, the country’s largest oil producer has sought to collaborate at home with leading international experts, such as Shell, to accelerate its shale development plans.

China had an estimated 354 billion barrels of shale-oil resources as of 2008, according to the London-based World Energy Council (WEC). However, only 7.6 million barrels of shale oil was produced in the same year, the WEC said.

In March, China announced the results of its most extensive official appraisal of shale-gas reserves having found potentially recoverable resources of 25.1 trillion cm.

China is believed to have some of the largest reserves of shale-gas in the world and has been working to develop shale-gas as a cornerstone of its energy policy. The new estimate is enough gas to meet the country’s current consumption for nearly 200 years if fully extracted.

However, having a huge reserve number that is potentially recoverable does not mean those resources will be produced. Extracting fuel from China’s shale could yet turn out to be uneconomical as there are numerous variables that still need to be understood. The Ministry of Land and Resources said China’s complicated geology and lack of technological expertise will make extraction difficult, but reaffirmed that shale-gas would be central to the country’s energy policy.

The government is encouraging the NOCs to develop optimal technology as it eyes a big leap in shale-gas production by 2020. Beijing hopes to produce between 60 billion cm and 100 billion cm annually by 2020, a level widely regarded as overly ambitious due to the many technological, environmental and regulatory hurdles ahead.

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