In mid-2013, Royal Dutch Shell's (NYSE:RDS.B) projects and technology director, Matthias Bichsel, summed up shale gas in six words: "Not all fields are created equal." That's important to keep in mind as you look at where shale gas fields are located. China is finding out the hard way that just having vast quantities of shale gas doesn't mean you can get it out of the ground. It's a good thing for the giant nation that the United States is willing to help.
What you got?
Bichsel explained that geologic factors differ materially between shale fields. For example, the rock formations can range from clay-like to brittle, which changes the dynamics of drilling. One big difference between U.S. shale fields and those in China is depth. China's gas is trapped at about 10,000 feet below the surface, while some of the riches trapped in U.S. fields are roughly half that deep. Industry watcher Wood Mackenzie cited that as one reason why it can cost twice as much to drill in China.
Fortunately for China, U.S. companies have a lot of experience when it comes to drilling shale formations. After all, these unconventional plays have led to what many are calling a U.S. energy renaissance. How good are U.S. companies? According to the U.S. Energy Information Administration, the number of drilling rigs in the Marcellus shale fell over 20% in 2013, but the output per rig increased 47%. While there are multiple reasons for this, the U.S. clearly has some serious shale formation credentials.
Halliburton (NYSE:HAL) is already stepping in to provide its experience to China. This international drilling giant has partnered with China's SPT Energy Group to drill in Xinjiang. Halliburton will own 49% of newly formed Xinjiang HDTD Oilfield Services, with SPT owning the rest.
This isn't exactly a giant leap forward for Halliburton. Shell's Bichsel highlighted the need to do extensive research to figure out if a shale region will work, including 2D and 3D imaging and, importantly, a dozen or so test wells. Why? "[T]here have been some great success stories in producing gas from shale formations ... there have been a fair number of disappointments too. We don't hear much about them." He noted Poland and the Green River in the United States as regions that just didn't work.
Interestingly, one key benefit of partnering with Halliburton is the company's expertise in water use. Hydraulic fracturing involves pushing water, sand, and chemicals into the ground to break up shale formations and free the oil and natural gas trapped there. It requires a lot of water, which happens to be in short supply in the Xinjiang desert, where Halliburton and STP are planning on drilling. That area, however, could hold up to a third of China's unconventional resources.
So Halliburton's partnership could turn out to be a gusher, or it could be a dud. Either way, there's a lot of work to be done.
What Halliburton is really getting through this deal is a toehold in China. And that could be more valuable than anything else, since the nation has massive energy needs and is looking to natural gas to help offset its use of coal.
That's why they came to us
Technology will be the key to China's shale success and it's why, according to Jonathan Lewis, Halliburton senior vice president of completion and production, "the Chinese have come to us." He believes the company's water-sipping pressure pumps and water-recycling technology will "help in developing the assets sustainably." However, he was quick to point out that "The ramp up won't be instantaneous; it's going to be a five- to 10-year journey."
China is a great opportunity for Halliburton, and for other U.S. shale specialists, to expand into new markets. Just remember that every shale play isn't created equal. That said, Halliburton looks like it has struck a potentially valuable deal in China, and you should keep a close eye on developments at its Xinjiang HDTD Oilfield Services joint venture.