Sinopec Marks Shale 2014 Priority After Fuling Breakthrough

Sinopec, Asia’s biggest refiner, marked shale gas development as its 2014 priority after doubling its output forecast from a key field in China’s southwest.

The Fuling project in 2017 will yield at least 10 billion cubic meters, compared with a goal of 5 billion for 2015, Chairman Fu Chengyu told reporters in Hong Kong yesterday, calling both estimates “conservative.” Over the longer term, state-owned Sinopec may also seek private investors to help develop its shale business, he said.

The company, officially known as China Petroleum & Chemical Corp., has already signaled its intent to attract private capital as part of government-driven reforms. It said last month it would seek investors for as much as 30 percent of its oil retail unit, in a sale Barclays Plc estimates could raise more than $20 billion.

“It’s the best shale gas discovery outside North America, and it’s going to be a game changer for Sinopec,” said Neil Beveridge, a senior research analyst with Sanford C. Bernstein & Co. in Hong Kong. “What’s important for Sinopec now is to move up the learning curve quickly and try to bring the cost down.”

Biggest Reserves

China, which holds the world’s biggest shale gas reserves, has set a national output target of 6.5 billion cubic meters by 2015, and as much as 100 billion cubic meters by 2020. The goals are meager compared with U.S. output of 266 billion cubic meters in 2012, as high costs, difficult terrain and a lack of infrastructure have stunted development, casting doubt as to whether even the lower target could be met.

“The breakthrough in the Fuling project marks a new stage of China’s shale gas development,” Fu said. “We thought it could take 10 years for us to get shale gas’s commercial production going, but with the Fuling project everything gets greatly accelerated.”

Sinopec’s shares gained 0.4 percent to HK$6.90 as of 10:19 a.m. in Hong Kong, compared with a 0.4 percent decline in the city’s benchmark Hang Seng Index.

Shale gas output will immediately contribute to Sinopec’s earnings, although margins for shale are lower than traditional natural gas, said Bernstein’s Beveridge.

Sinopec is working on a shale gas exploration plan beyond 2017 and will announce the details by the year’s end, Fu said. The official Xinhua News Agency reported that the company is in talks with France’s Total SA on a shale gas venture, citing Total’s Chief Executive Officer Christophe De Margerie.

Shale Target

Lv Dapeng, Sinopec’s Beijing-based spokesman, did not answer two calls to his office line seeking comment. A Total spokeswoman in Paris could not provide immediate comment.

The target of 10 billion cubic meters will come from an area of about 200 square kilometers (77 square miles). Sinopec’s shale parcel around Fuling extends for 4,000 square kilometers and has 2.1 trillion cubic meters of shale gas reserves, Fu said.

“The reserve is huge and has the potential to shake up China’s energy production landscape,” Fu said.

China holds 25.08 trillion cubic meters of exploitable onshore shale-gas reserves, the Land and Resources Ministry said in March 2012. The U.S. has 13.65 trillion cubic meters of technically recoverable gas from shale formations, its Energy Information Administration said in January that year.

Annual Production

China’s annual shale gas production surged more than fivefold in 2013 to 200 million cubic meters a year, according to the land ministry. The country consumed 169 billion cubic meters of gas in 2013, with about one-third coming from imports.

Fu said the company’s second priority in 2014 will be to push ahead with loosening state ownership and inviting private capital to invest across its operations.

The company joins domestic peer PetroChina Co. in seeking private investors across a swathe of units, as China pushes its most aggressive reforms in more than a decade to bolster market forces in its economy and keep pace with growth targets. PetroChina and its parent China National Petroleum Corp. are considering opening up areas including pipelines, oil and gas exploration and refining to private capital.

Fu said the company is conducting an internal review of its oil retail business, with a view to adding private investors in the third quarter. Priority will be given to strategic investors that can bring advanced technology, management and marketing expertise, Fu said.

Domestic interest will be considered first, although the bidding process will also be open to international investors, he added.

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