4 Reasons Why China Needs Chevron

On December 6, Chevron (NYSE: CVX  ) announced that it would delay its $6.4 billion Chuandongbei gas project in China due to disagreements with partner PetroChina (NYSE: PTR  ) on how to develop the field.

The project is Chevron's largest investment in China and is slated to produce around 7.6 billion cubic meters of natural gas per year. 

For Chevron, China is a key market. China has the world's largest population and, according to many economists, will have the world's largest economy within a decade.

Since electricity usage generally correlates with GDP growth, China's energy demand is projected to increase significantly. As much as Chevron needs China, China also needs Chevron. Here are four reasons why. 

Huge potential that only Western tech can unlock
According to the Energy Information Agency, China has the world's largest technically recoverable shale gas resource at around 1,115 trillion cubic feet. China's shale gas is located in tougher, more foreboding geological formations than shale gas in United States. 

Unlike Chevron and other oil super-majors, Chinese companies do not currently have the necessary knowledge, equipment, or experience to perform the deep horizontal drilling and fracking needed to extract these resources. 

The quest for Western drilling technology to unlock those sizable natural gas reserves was the principle reason CNOOC (NYSE: CEO  ) bought Canadian oil and gas company Nexen (NYSE: NXY  )  and is also the main reason China needs to involve Chevron. 

Thus far, China has drilled only 60 horizontal wells used in fracking, versus about 200,000 for the United States. With Western oil companies' help, China hopes to double natural gas' contribution of the total energy mix from the current 4% to 8% by 2015. 

Less pollution 
Sixteen of the world's 20 most polluted cities are Chinese. 

A big part of China's pollution can be attributed to coal. According to the Energy Information Agency, coal produces almost twice as much carbon dioxide as natural gas. 79% of China's electricity is generated by burning coal versus 45% in the United States. 

By allowing oil companies like Chevron to produce cleaner natural gas domestically, China can burn less dirty coal and reduce its pollution.

Better energy security
China currently imports 2.9 million barrels a day ,or around 60% of its total oil imports from the Middle East.

The Middle East has long been known for its instability. Unlike the U.S., China does not have the ability to protect strategic choke-points such as the Strait of Hormuz through which 20% of the world's oil flows or the Strait of Malacca where over 15.2 million barrels of oil equivalent flow per day. 

Any energy instability in China could lead to social unrest much in the same way as the Jasmine Revolution led to unrest for Middle Eastern countries, and China's government will do whatever it takes to prevent that scenario.

Developing domestic shale resources reduces China's dependency on Middle East regimes and increases energy security.

Leverage on Russian pipeline negotiations
According to the Energy Information Agency, Russia has the world's largest natural gas reserves at 1,680 billion cubic feet.

Russia wants to sell China natural gas, but China is hesitant to commit due to the long-term, fixed price nature of gas contracts.  If China can unlock its own resources, the extra domestic supply will give it more leverage in negotiating a lower price for Russian natural gas. 

The bottom line
At the end of the day, China needs Chevron as much as Chevron needs China. Developing oil and gas is not a zero-sum game; both China and Chevron can win. 

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