China’s Shale Gas Boom

The impressive development, which according to The Wall Street Journal has taken place over the past year, indicates that many more changes are necessary if the nation is to meet its high gas production targets.

A two-player industry — for now

There are two companies currently producing shale gas in China, as per the Journal. State-run China Petroleum & Chemical (HKEX:0386), or Sinopec, is the first and most significant. According to Sinopec representatives, development of the company’s first shale gas field, located in the Fuling district of Chongqing, is running ahead of schedule. It is expected to produce 1.8 billion cubic meters of gas by year’s end.

As of March 2, the Fuling project had recorded a daily production level of 2.2 million cubic meters, up from 1.5 million cubic meters, states Chongqing Daily, the municipality’s official newspaper. Sinopec Chairman Fu Chengyu said the Fuling agreement means the beginning of a massive development in shale gas in China.

The other company in the Chinese shale gas industry is Royal Dutch Shell (NYSE:RDS), which is partnered with China National Petroleum. Shell is currently producing tight gas in Changbei, Shaanxi province, and plans to drill in the Sichuan basin.

“A number of the areas have gone into extended well testing and we are getting to the appraisal side of things,” Maarten Wetselaar, executive vice president at Shell’s integrated gas business, told the Journal. He cautioned that an assessment of this drilling activity will take quite some time.

Replicating the US boom

China has some of the richest deposits of shale gas and oil on the planet, as well as the largest amount of technically recoverable assets, according to the Energy Information Administration. Total reserves are estimated at 134.42 trillion cubic meters, so the raw material for a shale gas boom in the country certainly exists.

Further, “[r]elative to the United States’ shale-gas plays, the [reserves] of the Sichuan and Tarim basins are potentially enormous and, if successful, could rival the Marcellus in terms of absolute scale,” Bernstein Research recently reported. However, those figures will only be significant if China can drill enough wells to take advantage of its resources.

The rock in China in particular is difficult to crack, so analysts had previously thought it would take some time for the country to be able to exploit its abundant resources. The current activities in the shale gas space in China prove that is incorrect, but the speed of production and expansion in China is still slow.

Indeed, so far there are fewer than 100 total shale gas wells in China, the Journal notes. That’s compared to 40,000 in the US.

One path toward more wells that China is exploring — as its dealings with Shell indicate — is partnerships with private companies. “Additional moves by the national oil companies to open the upstream and downstream to private capital will also expedite the timeline for shale production, even if the government remains unlikely to meet its highly ambitious 2015 and 2020 targets,” Eurasia Group recently said in a report.

What investors need to know

As Investor Place points out, for investing in China’s shale gas boom, investors really only have two options: Sinopec and Royal Dutch Shell, as mentioned above. Investors concerned about holding Chinese stocks directly may be interested in Shell instead of Sinopec, though the publication asserts the potential for growth is greater in Sinopec than in Shell.

China is concertedly courting foreign investment in its shale gas fields, according to several sources, so there should be no concerns about the market being dominated by the state.