Source: AFP via Getty Images

BP Taking a Bet on China's Shale Gas While Shell Backs Out

  • Shell sees `no follow up investment that can be justified'
  • BP's shale gas agreement part of broader deal with CNPC

BP Plc is seeking to hit it big in China’s shale gas fields where competitors including Royal Dutch Shell Plc have struck out.

The London-based explorer on Thursday signed its first shale-gas production deal in China, joining the nation’s biggest oil company, China National Petroleum Corp., to target the same areas that rival ConocoPhillips has walked away from. Shell separately on Friday said it’s giving up on its shale acreage in China, where challenging drilling conditions stymied the exploitation of what’s estimated to be the world’s largest reserves.

“It is an intriguing move, as in many ways BP is swimming against the tide,” said Angus Rodger, a Singapore-based analyst at consultant Wood Mackenzie Ltd.

BP’s entry into Chinese shale comes after a pull back by international oil companies, which have relinquished the majority of the country’s areas they agreed to study since 2010, according Wood Mackenzie. In a departure from previous deals with foreign firms, CNPC will be the operator of the BP project in the Neijiang-Dazu block in Sichuan basin.

“BP will share in the expenses and contribute technical expertise without committing ground troops in China,” Gordon Kwan, head of Asia oil and gas research at Nomura Holdings Inc. in Hong Hong, said by phone Friday.

Not Justified

The deal follows a broader agreement between the two companies signed during President Xi Jinping’s visit to London in October, which also covered fuel retailing and oil exploration, as well as LNG and carbon emissions trading.

Shell, which sealed a production-sharing contract in 2012 with CNPC unit PetroChina Co. in the Fushun-Yongchuan block in Sichuan basin, said it wouldn’t proceed with investments after facing challenging geology and mixed drilling results.

"We have decided that there is no follow up investment that can be justified," Jessica Miao, a Beijing-based spokeswoman, said in an e-mail Friday.

ConocoPhillips entered into a joint-study agreement for a 500,000-acre area of Neijiang-Dazu in 2013, though decided not to pursue a production agreement, the company said in its 2014 annual report.

The country’s two biggest shale gas developments are run by state-owned energy giants -- CNPC’s Weiyuan-Changning project and China Petroleum & Chemical Corp.’s Fuling field, both in the Sichuan basin.

State Operated

“The fact that BP is not operating may work in its favor,” Rodger said. “The two material shale projects that are underway in China and ramping-up are both operated by Chinese national oil companies."

China Petroleum & Chemical, known as Sinopec, announced Wednesday that it’s developing a new Sichuan shale field that may produce 2 billion cubic meters annually. The bulk of the company’s shale output comes from the Fuling field in Chongqing, according to President Li Chunguang. The company made several significant discoveries in Sichuan and the Erdos basin of Inner Mongolia in the past year, the company said.

“CNPC is playing catch up with Sinopec in shale gas exploration and wants more expertise from the international majors,” said Wu Kang, a Beijing-based analyst with industry consultant FGE.

Cleaner Fuels

Premier Li Keqiang reiterated last month China’s goal of boosting production and use of natural gas as a substitute for coal. While conventional gas production is rising, China missed its annual shale gas target of 6.5 billion cubic meters last year and earlier reduced its 2020 production goal to about a third of its original estimate, citing difficult geology, lack of infrastructure and limited exploration rights.

“BP thinks China has good shale-gas potential and we will bring our international experience and skills to this partnership,” said David Nicholas, a spokesman for BP in London. “CNPC has the local base and regional geological and operational knowledge and we think they’re best suited to be the operator.”

CNPC didn’t immediately respond to requests for comment.

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