Shell Looking to Cash in on PetroChina’s Quest for Shale Gas

By Robert Sullivan – Exclusive to Gas Investing News

A string of recent ventures involving Royal Dutch Shell plc (NYSE:RDS.A) and PetroChina Co. Ltd. (NYSE:PTR) has started to reveal what may eventually emerge as one of the world’s premier shale gas partnerships.

China, with an 1,275 trillion cubic feet (tcf) of technically recoverable shale gas resources, is certainly not short of supply, but what it does lack is the technology and know-how to extract the hard to reach gas from the country’s complex shale formations.

It has tasked its three major state-owned oil and gas companies: PetroChina, Sinopec Corp. (NYSE:SHI), and CNOOC  Ltd.(NYSE:CEO), with acquiring the requisite expertise in shale development from foreign operators to unlock their vast domestic reserves.

And PetroChina, the listed arm of state-run China National Petroleum Corp. (CNPC) and the largest downstream operator of the three, has increasingly been turning to Shell to achieve this.

Shell-PetroChina tie-ups

The first significant unconventional gas project together was a $1.3 billion tight gas JV at the Changbei  gas field in Northern Shaanxi province.

With the first commercial production in 2007, the field now produces 3 billion cubic meters (bcm) of gas per year, due in large part to horizontal drilling led by Shell.

Shell and PetroChina also partnered up in 2010 to jointly acquire Australian coal-seam gas (CSG) developer Arrow Energy Ltd. for $3.77 billion.

Arrow has since acquired fellow CSG developer Bow Energy Ltd. for $540 million, and the output from both companies is expected to feed Arrow’s proposed Liquefied Natural Gas (LNG) project in Queensland, with LNG from the facility more than likely to be sent onwards to China.

In December, meanwhile, a Shell-PetroChina JV discovered shale gas at their Fushun-Yongchuan block in Sichuan province.

Although the well took nearly 13 months to drill, its completion marked another important milestone for PetroChina, who had already drilled the country’s first ever horizontal shale well in March 2011.

Shell and PetroChina are now looking to sign a production sharing contract (PSC) to move forward and develop the Fushun-Yongchuan project, and PetroChina have also been drilling two of their own wells in Sichuan.

Results such as this one will certainly be what both Shell and PetroChina had in mind when they agreed in June 2011 to increase cooperation in energy exploration in China.

According to Shell’s Chief Financial Officer Simon Henry, the partners invested more than $400 million in Chinese shale projects last year.

Recent developments

2012 began with Shell acquiring a stake in the Zitong block in Sichuan province for $160 million from Ivanhoe Energy Inc. (TSX:IE), which will see it partnered in a 30-year production sharing contract to develop the tight gas project along with PetroChina and Mitsubishi Gas Chemical Company Inc. (TSE:4182) of Japan.

And this cooperation drive has recently crossed the Pacific to the heart of shale gas development in North America, with PetroChina acquiring a 20 percent stake in Shell’s Groundbirch shale gas property in north-east British Columbia.

The 60,000 acre Groundbirch property is part of the Montney Shale formation, which stretches south from the Horn River in British Columbia and into Alberta.

Reserves are estimated by Shell to be upwards of 8 trillion cubic feet and, by late 2010, Shell was reporting total output from Groundbirch of more than 175 million cubic feet per day.

The deal, reportedly topping $1 billion, will see Shell remain operator of the project, but once again give PetroChina vital access to expertise that could eventually be used back in China.

Speaking to Bloomberg on February 3, Gordon Kwan, head of energy research at Mirae Asset Securities Ltd. in Hong Kong remarked that “although PetroChina will gain just a minority stake, the firm can re-deploy any advanced technologies acquired overseas back home to better exploit China’s vast shale-gas reserves.”

Shell will be keen to use their established relationship with PetroChina to remain a central part of these developments back in China, particularly as PetroChina becomes able to scale up production and more effectively tap into the country’s vast shale reserves.

But some experts also believe that Shell will have to remain mindful of the fact that they are dealing with the one of the largest companies in the world, backed by the ambitions of a rising China.

One former executive told Bloomberg Business in November that “even though Shell has been clever in leveraging its position, you can’t ignore the fact: [Shell] are now partnered up with the guy who doesn’t want to be partnered with you long-term…[PetroChina] is not in this to be a partner with Shell. They want to be Shell. They want to replace [Shell].”

Disclosure: I, Robert Sullivan, hold no direct investment interest in any company mentioned in this article.