Royal Dutch Shell, CNPC Ink First Chinese Shale Gas Production-Sharing Deal

on March 21 2012 9:15 AM

Royal Dutch Shell PLC (NYSE: RDS) on Wednesday said it signed a production-sharing contract to help China National Petroleum Corp. develop untapped reserves of shale-embedded natural gas.

The contract covers a 3,500 square kilometers (1,350 square miles) area in Sichuan province. China has huge shale gas potential and we are committed to making a contribution in bringing that potential into reality, Shell CEO Peter Voser said in the statement.

Although shale gas is a cleaner alternative to coal and oil, extraction costs are high; until new drilling methods, the reserves were thought inaccessible. Under the agreement, Shell will provide CNPC technical expertise and assistance to explore, develop and produce shale gas in southwest China's Fushun-Yongchuan block in the Sichuan Basin. 

China, like the United States, is a big consumer of the world's energy; both countries as a result are seeking to reduce their reliance on coal and oil imports. Hydraulic fracturing is widely expected to reverse the U.S.'s heavy reliance on oil imports and turn it into a net exporter of gas. The controversial technique uses water, sand and chemicals to fracture rock and release trapped gas; though some fear it is harmful to the environment.

While China may have 50 percent more shale gas reserves than the U.S., according the Energy Information Administration, it's shale gas industry is still in its infancy and lags far behind the U.S., which had an annual output of 170 billion cubic meters in 2011.

As part of a five-year plan to increase China's capacity to tap shale gas, the country has set a goal to produce 6.5 billion cubic meters of shale gas a year by the end of 2015.

In early March, the Ministry of Land and Resources estimated China has 25 trillion cubic meters of recoverable shale gas.

By 2015 -- if China has the technology needed to better explore for and recover shale gas -- the country could increase its annual output to as much as 100 billion cubic meters by 2020, Zhang Yuqing, head of the National Energy Administration's oil and gas department, told China Daily.

Other companies including BP PPL (NYSE: BP) and Chevron Corp. (NYSE: CVX) also have partnership with Chinese companies for shale gas exploration. Earlier this week, Total SA (NYSE: TOT) said it reached a pre-agreement with China Petroleum & Chemical Corp., or Sinopec, to search for and produce shale gas.

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