Who Will Be the Major Players in the Chinese Shale Revolution?

The Chinese shale opportunity continues to frustrate, but these oil companies will ultimately benefit.

Apr 23, 2014 at 8:25AM

The downsides of the American shale revolution are quite clear. Hydraulic fracturing and horizontal drilling have environmental side effects, use precious fresh water, and may make minor earthquakes more likely. 

To many, the downsides of hydraulic fracturing and horizontal drilling are not worth it. States like New York have placed moratoriums on fracking, while European countries like France have banned it.  

To a country like China, however, fracking looks enticing.

From the Chinese government's perspective, fracking represents a way to solve many of the nation's problems. Fracking has the potential to create hundreds of thousands of jobs and make the nation's manufacturing more competitive. It could mitigate the country's dependence on foreign energy and reduce the nation's pollution. 

China is also very lucky in that it has significant shale resources -- 1,275 trillion cubic feet of technically recoverable shale gas versus the United States' 862 trillion cubic feet. 

To realize its potential, the Chinese government has an official goal of producing 6.5 billion cubic meters of natural gas annually by 2015 and as much as 100 billion cubic meters annually by 2020. The Chinese goals represent a golden opportunity for international oil and gas companies. So which companies will be the major international players in the future Chinese shale revolution?

Super-majors, not independents
In the United States, the major players in the shale revolution were small players like Pioneer Natural Resources and Continental Resources. The super-majors initially dismissed the American shale opportunity and thus missed out on the subsequent boom. In China, the super-majors will not miss out on the opportunity again.

One company participating in the Chinese shale opportunity is Royal Dutch Shell (NYSE:RDS-B). The Anglo-Dutch conglomerate is teaming up with state giant China National Petroleum Corporation to explore the Fushun-Yongchuan block in China's promising Sichuan basin. So far, the two companies have drilled 24 wells last year and plan to drill 14 more wells this year.  

Another super-major participating in the Chinese shale opportunity is Total SA (NYSE:TOT). The French company is working with Sinopec to look for economically recoverable shale gas in a 4,000 square-mile space near China's eastern city of Nanjing. If they find economical reserves, Total and Sinopec may agree on a long-term development deal over that acreage. 

Not to be left out, Chevron (NYSE:CVX) is in China as well. The company is exploring China's Qiannan Basin for shale gas and has drilled two wells so far.  

The bottom line
Most experts believe that the Chinese shale revolution is still years away. Chinese shale geology is tough. The cost to develop an average Chinese shale well is $15 million versus $7 million for an average American shale well. China also does not have the necessary infrastructure for these projects or as much fresh water as the U.S. 

Despite the challenges, the super-majors in China are very determined. In comparison with other investment opportunities that include geopolitical risks, Chinese shale is very promising. It is really a matter of when, not if, China's own shale revolution will occur. When the shale wells do start producing natural gas in meaningful quantities, the three super-majors in China will reap significant benefits.

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Jay Yao has no position in any stocks mentioned. The Motley Fool recommends Chevron and Total SA. (ADR). 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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Jun 12, 2015 at 5:01PM

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