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China Ready to Reap Billions From U.S. Shale Gas Technology

By Matthew DiLallo – Aug 2, 2013 at 4:00PM

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After investing billions to tap into U.S. shale gas technology, China is now set up to reap billions in profits from what it learned.

Photo Credit: Flickr/Tomas Roggero

China has spent billions of dollars in the U.S. to snap up joint venture deals with the pioneers of the shale gas revolution. While it would appear on the surface that China is interested in locking up its own supply of natural gas, that might not be the case. Instead, what's much more likely is that China is using these deals to gain valuable education and access to U.S. shale gas technology. It's now poised to take what it learned back home so that it can start its own shale gas revolution.

According to estimates by the U.S. Energy Information Agency, China has the most technically recoverable shale gas in the world. If fact, it estimates that China has nearly double the technically recoverable reserves of the U.S. The problem was that it didn't know how to develop its own reserves, until now.

Chinese oil and gas companies have quietly been investing billions into shale gas leaders like Chesapeake Energy (CHKA.Q) and Devon Energy (DVN 2.50%) to gain technical know-how. It has been selectively investing in some of America's early stage shale plays like the Mississippian and the Utica to gain insight into how shale gas pioneers develop these plays. Sinopec, for example, has been active with both. It signed a billion-dollar deal with Chesapeake concerning the Mississippi Lime formation in Oklahoma, and a $2.5 billion deal with Devon which included the Mississippian as well as the Utica, Tuscaloosa, and emerging plays in Michigan and the Rockies. In both deals, the U.S.-based producer served as the operator while Sinopec provided the capital.

Photo Credit: Chesapeake Energy

While Sinopec undoubtedly wanted to earn a financial return, what it was really after was learning how our technology worked. Now it appears to be ready to take the next step and start to apply what it has learned back on its own turf. One of Sinopec's next steps is rumored to be signing another joint venture with a company that has a lot of experience working U.S.-based shale basins. This time, it is with oil-field service company Weatherford (NYSE: WFT), which would enable Sinopec to focus its efforts on how to develop its country's vast shale resources.

It won't be an easy next step. While China is the world's fourth-largest natural gas consumer, so far the country has only drilled 150 shale gas wells, with minimal commercial success. China's reserves are locked in much more technologically and environmentally challenged locations due to complex geology, high population density, and water shortages. It needs to move past these challenges in order to start to make progress.

This is where oil-field service companies really can step in and take things to the next level. The idea is to harness the technical know-how of a company like Weatherford to unlock China's vast potential. Weatherford isn't the only oil-field service company chomping at the bit to help China unlock its oil and gas reserves. Companies like Baker Hughes (BHI) and Halliburton (HAL 0.13%) both have set up shop in the country and are looking to expand beyond the current focus of exploring for conventional oil and gas. Given that water is a big issue for China (remember, hydraulic fracturing requires millions of gallons of water per well), Halliburton has the advanced technology which could be key to unlocking the country's resources. The company is currently pushing ahead with its H2O Forward service in the Bakken, which is designed to recycle produced water onsite saving oil and gas producers from having to constantly secure sources of fresh water. That system could someday really help to alleviate China's water issues. Meanwhile, Baker Hughes has been working with its partners in the country to study shale gas prospects in order to provide oil-field services to producers. China is poised to benefit as these technologies advance.

The goal of oil-field service companies and Chinese producers is to take what was learned in the U.S. and figure out the best way to apply that knowledge to China's reserves. While these companies are still early in the process, given China's voracious appetite for energy, the potential profits are very appealing. That's why it would appear that China is on the verge of finally cashing in on its investments focused on gaining knowledge of U.S. shale gas technology. 

Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Halliburton. The Motley Fool owns shares of Devon Energy and has the following options: long January 2014 $30 calls on Chesapeake Energy. 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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