China's Ascent to Global Energy King

Lately, the energy headlines here at home are filled with outcries against pipeline construction and hydraulic fracturing. If you read past that you will discover that natural gas prices are really low. If you read past that, you may finally realize that China has larger natural gas reserves than we do, and its energy companies are buying small stakes in American operations. Gaining assets and expertise abroad and given the green light for development at home, China is slowly growing into a world energy power.

Gas at home
China's ministry of land and resources pegs its shale gas reserves at 26 trillion cubic meters, or approximately 918 trillion cubic feet. The Energy Information Administration said the country could have up to 1,275 TCF in reserves. Regardless, the smaller of the numbers is still 10 times the estimated reserve of China's conventional gas sources, and a study by the EIA indicates China's technically recoverable reserves are 50% higher than the United States'.

As a top energy user, China has no reason to hesitate when it comes to developing its reserves, and the close ties between business and state in the country mean that things are moving full speed ahead.

The Chinese government recently approved shale gas as an independent mining resource in January, allowing more Chinese firms to legally develop the resource. Foreign companies may not participate, but they may partner with Chinese companies.

Gas -- and experience -- abroad
Those partnerships have been crucial to developing expertise within Chinese energy companies such as PetroChina (NYSE: PTR  ) , CNOOC (NYSE: CEO  ) , and Sinopec (NYSE: SHI  ) .

At the beginning of the year, Sinopec inked a deal with Devon Energy (NYSE: DVN  ) for a one-third interest in five of Devon's U.S. properties. The properties span the United States from Appalachia to Colorado and feature a mix of different geologic formations rich in dry and wet gas. Talk about exposure to the industry.

Last year, CNOOC coughed up $1 billion to get in on a joint venture with Chesapeake Energy (NYSE: CHK  ) , the second-largest producer of U.S. natural gas.

PetroChina has been active in Canada, signing a deal with Royal Dutch Shell for a 20% stake in its Montney Basin natural gas project. The play is estimated to contain 1 billion cubic feet of gas.

China's first wells
With the help of Royal Dutch Shell, the first horizontal shale gas well appeared in Sichuan province in April of last year. Since then, China's three largest energy companies, Sinopec, CNOOC, and the China National Petroleum Co., have all started the exploration and production process. Sinopec and CNPC have both completed more than 10 wells, while CNOOC, China's largest offshore producer, has started seismic operations in Anhui province. It marks the first on-land foray for CNOOC. The early well results show promising, though not commercial level, results.

In the meantime, Chinese companies look to improve their fracking faculties via another acquisition. Sinopec and CNOOC are competing with Saudi Arabia's state-owned Saudi Aramco for a 30% stake in Frac Tech Holdings, a U.S. shale gas services company. The deal is likely to be valued at around $2 billion.

Gas from coal
Another small U.S. company is helping China produce even more gas, this time from a coal-to-gas conversion process known as hydromethanation. GreatPoint Energy, a Massachusetts-based start-up, will build a plant in Western China that will produce 30 billion cubic feet of natural gas a year by 2015, and 1 trillion cubic feet a year when it is running at full capacity. The plant is expected to meet 0.5% of China's energy needs on an annual basis. Sinopec will build the pipeline infrastructure to bring the gas to markets in the East.

Foolish takeaway
The development of China's natural gas reserves may have a significant effect on the global economy. Little-picture outlook: An increased emphasis on natural gas will affect coal consumption, but it will also affect liquefied natural gas exports in places like Qatar and Australia, a country that has placed a very large bet on LNG. Big-picture outlook: A formidable economy frees itself from the yoke of dependence on foreign energy sources. And who can say for sure what that will ultimately result from that sort of freedom.

As the natural gas market continues to grow, at home and abroad, one company stands to reap profits from this energy revolution. Click here to check out The Motley Fool's special free report.

Fool contributor Aimee Duffy owns shares of Statoil, but she holds no other position in any company mentioned. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.

The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Devon Energy and Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 07, 2012, at 7:42 PM, clbjblk wrote:

    A little insight, tomorrow T.Boone Pickens is giving a little insight for the energy business at 11.00 central time, you know he is going to push Nat GAS which is one of the Motley Fools plays with Westport but there is this little penny pink stock Altima Resources pink ticker ARSLF for about a nickle, what is interesting is the President of Altima and .T. Boone go way back and this little nickle stock is right in the middle of some big boys property wise,if you do your home work you will see who surrounds ARSLF property and they just capped some black gold,now my friend who works up there has told me that there has been a lot of Asian suits participating in some very obvious lunches and she assumes business meetings and she does not even play the markets but little ol me put 2 and 2 together and then looked up Altima only to see that T B Pickens said if anybody can find some juice in the ground it was none other than Richard Switzer who used to work and do business with as he calls him the Pick and he is the President of Altima so I figured I have got more to gain than loose and bought a block of this penny stock what is funny is the volume will be just a few shares bought one day and than a huge amount the next.Now I know Horn River Basin is full of juice but I think next year it will be headed across the big pond to Asia instead of the good ol USA and my friend said she was not ease dropping but she heard one tell the other that what ever is offered the Asian suits will double it,I did a little more home work and of coarse China came up but my friend also said she has heard the name Mitsubishi I probably spelled that wrong but I think it was worth mentioning,this is not a pump and dump it is just little ol me talking to a friend from a long time ago so do your own home work all I know is my friend up north said she can't wait till spring and I live in Oklahoma and it has been a no winter year but up there and Alaska they had just the opposite and they use logs and we use gas.So I know I have been long winded but look it up it is like that old joke that says for a nickle I will, but one thing I know is Motley Fools day is coming with that Westport tout it will just take time to work the money out.Happy Hunting!

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