File:A picture from China every day 143.jpg

Source: Wikimedia Commons

The U.S. has undergone a major energy boom as a result of shale drilling, but it isn't the only nation with expansive shale gas reserves. The U.S. Energy Information Administration estimates that China could be sitting on top of 1,275 trillion cubic feet of natural gas, 50% more than America. That would make China the largest shale gas play in the world.

While North American natural gas prices are low, Asia is a very lucrative market for dry-gas producers. Royal Dutch Shell (NYSE: RDS-A) has teamed up with PetroChina (NYSE: PTR) to try to tap into China's colossal reserves.

Up and up
Shell signed a deal with PetroChina back in 2012 to develop a block in Sichuan. Shell and PetroChina plan on ramping-up drilling activity in 2014 once all of the appraisal wells are completed.

Shell and PetroChina are drilling appraisal wells in the Fushun-Yongchuan part of the Sichuan, with commercial production planned for beyond 2014.

So far, commercial production from China's shale has been small because most of the wells being drilled are for exploratory and appraisal purposes. Shell and PetroChina plan to start bringing meaningful commercial production online within the next few years as it seems very likely China's shale gas is plentiful.

Shell formed a joint venture with PetroChina and was the first to win a shale-gas contract with China. For 2013, Shell plans on investing $1 billion into developing China's shale. One of Shell's former executives said that Shell plans on spending at least $1 billion a year on China, which will probably increase by 2014-2015 as Shell and PetroChina near commercial production.

The big thing to note about China's shale gas is that China desperately needs to reduce the amount of smog and pollution in its cities. Beijing plans to do so by increasing the amount of taxis that run on natural gas and by adding in 7,000 public buses than run on natural gas by 2015.

By year-end, Beijing wants to have 10,000 vehicles powered by natural gas, up from 2,000 previously. Natural gas will significantly reduce pollution levels and in China can cost 30%-40% less than diesel.

Shell and PetroChina plan to help out China both economically and environmentally, but for a nation as big as China, it will take much more than just Shell and PetroChina to get the job done. 

Another partnership
Hess (NYSE: HES) and PetroChina have teamed up to develop 200,000 acres in the Santanghu basin to discover shale oil. Shell was also interested in the basin but decided against entering a joint-study agreement.

Hess has plenty of experience in North Dakota's shale, which it hopes to carry over to China. If oil can be found within China's shale, then the possible reward gets much bigger. While the oil and gas market in China is full of red tape and state-run enterprises, the discovery of crude would make the production mix much more valuable.

Even if crude isn't found and Hess' shale-oil venture turns out to produce just natural gas, Hess will still generate significant cash flow from the operation. Hess is smart to enter China's shale, even though it will take a while for Hess' bet to pay off. Hess is investing in the future, so even if Bakken production slows down Chinese production can be ramped-up.

Hess and Shell are planning for the years ahead, a future in which natural gas will be a dominant source of electricity generation. Currently natural gas is only 5.7% of China's energy consumption, but by 2020 China hopes to increase that to 10%. Keep in mind that 10% will be of a much bigger pie, as China's large economy is still growing at 7% a year.

Final thoughts
China needs natural gas to reduce emissions and bring down its pollution levels, while Shell and Hess need new sources of growth for the decades to come. So having private-sector capital and expertise come into China benefits both parties, and the world as a whole.

Shell and Hess haven't even begun commercial production yet, but hopes are high for both companies based on their current findings. 

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