CNPC, Shell Sign China's First Shale Gas Production Agreement

State-owned China National Petroleum Corporation (CNPC) and Shell China Exploration and Production (Shell) have signed China's first-ever shale gas production sharing agreement, under which they will together explore and exploit the up-and-coming energy source many say could spark a global energy revolution. Analysts believe the landmark agreement will be the first of many as foreign investors look to cash in on the abundance of shale gas resources in China.

Shale gas is type of a natural gas trapped within shale formations, and is increasingly being utilized as an energy source around the world. The United States, in particular, has been slowly moving its energy portfolio away from coal thanks to new technology that makes shale gas extraction easier and more efficient.

On March 20, CNPC and Shell signed a cooperation agreement for shale gas exploration, development and production in the Fushun-Yongchuan block of China's Sichuan basin. The agreement is now awaiting approval from the Chinese government.

"Shell will apply its advanced technology, operational expertise and global experience in the project to jointly develop the shale gas resources with CNPC," the Dutch firm said in a statement.

The deal marks the first shale gas production sharing agreement ever signed in China. Prior to this, BP and US-based Chevron announced separately that they had entered into agreements with Chinese companies to explore or develop shale gas. Executives of France's Total also revealed that they have entered into preliminary shale gas agreements with a number of companies in the country, which will be affirmed once the government announces specific exploration targets.

The current influx of foreign companies looking to tap China's shale gas resources is likely only a sign of more to come in the future. Malaysia-born Lim Haw Kuang, the executive chairman of Shell Companies in China, told reporters that his company's future shale gas goals include partnering up with all of China's state-owned oil companies.

Last month the Ministry of Land and Resources estimated that China has 134.42 trillion cubic meters of shale gas reserves, of which 25.08 trillion are potentially recoverable. Other countries have been more conservative in their estimates. Last April, the US Energy Information Administration estimated the world's total shale gas reserves to be roughly 187 trillion cubic meters, of which America had 24.4 trillion and China 36 trillion. Still, both numbers show that China has more shale gas reserves than any other country in the world.

According to Lin Boqiang, a professor at Xiamen University's China Center for Energy Economics Research, China's dependence on fossil fuels is increasing every year. The US, on the other hand, has begun reducing its use of relatively dirty energy sources due an increase in shale gas and alternative energy sources.

On March 16, China's National Energy Administration released its shale gas development plan for the 2011 to 2015 five-year plan period, which forecasts the country's output to skyrocket from virtually zero to 6.5 billion cubic meters by 2015. It estimates a further rise to between 60 billion and 100 billion cubic meters annually by 2020, which would make shale gas one of the country's most vital energy resources.

Despite the optimistic forecasts, some analysts believe it will be difficult to reach these targets given the current complexities in shale gas exploration and extraction, and especially as China lacks in industry-leading technologies. Further, some shale gas reserves in China, such as those in the Sichuan basin, are deeper than those in the US, meaning exploitation will be more challenging.

Xiong Wei, a senior researcher at the Natural Gas Economic Research Institute of PetroChina Southwest Oil and Gas Field, says China's shale gas exploration industry is still relatively immature compared to those of other countries, and could benefit greatly from working with experienced multinational companies.

In December last year, China's cabinet designated shale gas an "independent mining resource," opening up the sector to private Chinese firms. Industry sources say a number of private enterprises such as Xinjiang Guanghui, MI Energy Corporation and Honghua Group have already made preparations to enter the shale gas industry, and are now waiting for the right foreign exploration partner to come along.