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PetroChina, Shell Deepen Ties for ‘Powerful’ Shale Potential

PetroChina Co. (857) and Royal Dutch Shell Plc (RDSA) deepened their collaboration in exploring unconventional gas resources with the Chinese company investing in a Canadian project and the European oil producer pledging to help it step up drilling to tap shale reserves in the second-largest economy.

China’s biggest oil producer said yesterday it bought a 20 percent stake in Shell’s Groundbirch shale-gas project in British Columbia. The two companies also plan to increase drilling in China to 20 to 25 wells this year from 15 in 2011, Shell’s Chief Financial Officer Simon Henry said.

Shell and PetroChina’s parent, China National Petroleum Corp., agreed in June to increase cooperation in energy exploration in China, estimated to hold the world’s largest shale-gas reserves. The partners invested more than $400 million in Chinese shale projects last year, Henry said.

China’s shale gas potential “could be very powerful,” Henry told reporters yesterday in London. “We’ve got the same acreage in China that we have in North America,” the equivalent of about 3 million acres in each region, he said.

PetroChina has gained 2.9 percent in Hong Kong trading in the past year, compared with a 13 percent slump in the benchmark Hang Seng Index. The stock fell 1.2 percent to HK$11.48 at the close. Shell has advanced 3 percent in a year.

Chinese shale may hold 1,275 trillion cubic feet of technically recoverable gas, or 12 times the country’s conventional natural-gas deposits, according to a U.S. Energy Information Administration report published in April. China’s “technically recoverable” reserves are almost 50 percent more than the 862 trillion cubic feet held by the U.S., the EIA said.

Horizontal Drilling

Shell and CNPC completed the country’s first horizontal shale-gas well in March. China held its first auction of shale- gas exploration rights last year and the country is yet to produce shale gas commercially. The government estimates output of the fuel trapped in rock may reach 6.5 billion cubic meters in 2015 and surge to 80 billion cubic meters by 2020.

“The quality of the wells has gone from the best they’ve ever had in China to a couple with disappointment,” Henry said. “Overall we are a bit better than expected.”

Shell will make a decision at the end of the year on whether to go ahead with the large-scale development of shale gas production facilities in China, the CFO said.

PetroChina expects to surpass its target of producing 1 billion cubic meters of shale gas in 2015, Mao Zefeng, the Beijing-based senior assistant secretary to the company’s board, said in an interview in Beijing yesterday. Commercial output of “a few hundred million” cubic meters is possible by 2013, according to Mao.

‘Making Good Progress’

“We’re making good progress in drilling,” he said. “The question is now not whether China has shale gas, but how we can streamline the production process and deliver the scale.”

PetroChina and domestic rivals are seeking technology to tap China’s shale gas resources through partnerships and acquisitions. Cnooc Ltd. acquired stakes in U.S. shale-gas acreage from Chesapeake Energy Corp. for a total of $1.65 billion in February 2011 and November 2010.

PetroChina plans to pay more than $1 billion for a stake in the Groundbirch property, Hong Kong-based FinanceAsia reported on its website, without saying where it got the information.

“I can confirm that CNPC will join us in Canada,” Shell’s Chief Executive Officer Peter Voser said in London yesterday. “It’s part of our global partnership to optimize our business working environment inside and outside China.”

Voser and Mao declined to give the value of the deal.

Shell will remain the operator of Groundbirch, and the project will continue to supply its customers in North America, Mao said. In the long term, PetroChina will explore the possibility of exporting the fuel to Asia in the form of liquefied natural gas, Mao said.

“Although PetroChina will gain just a minority stake, the firm can re-deploy any advanced technologies acquired overseas back home to better exploit China’s vast shale-gas reserves,” Gordon Kwan, head of energy research at Mirae Asset Securities Ltd. in Hong Kong, said by e-mail.

To contact the Bloomberg staff on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net; Aibing Guo in Hong Kong at aguo10@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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