PetroChina, US' Hess Ink PSC for Xinjiang Shale Oil Block: Sources

Chinese state-owned PetroChina has signed a production sharing contract for the Malang shale oil block in China's western Xinjiang province with US oil company Hess, two sources at the Chinese company said Tuesday.

The National Development and Reform Commission had said on its website on Monday that it had approved last month the PSC for the Malang block, inked between PetroChina and a foreign company. But it did not identify the foreign partner.

Upstream sources at PetroChina said the company had signed the contract with Hess earlier this year and it was then submitted for NDRC approval.

"I believe some preliminary work has already started," said one source, without providing details.

The Malang block is in the frontier Santanghu Basin located in north Xinjiang. PetroChina's parent China National Petroleum Corp. had said in April that it was in talks with Hess and Royal Dutch Shell to cooperate on projects in the basin and that the parties were negotiating commercial terms for equity stakes and work targets during the exploration phase.

The Malang PSC is likely different from a conventional oil and gas contract, and could include fiscal incentives to enhance its attractiveness, IHS upstream analyst Huang Xinhua said Tuesday.

"The main challenge is still geology and technology. PetroChina experimented with shale oil in the past but did not make much progress. I believe costs are still very high," he said.

"The government's focus has been on shale gas rather than shale oil, but perhaps Hess saw an opportunity to gain entry into China's upstream [market] with this block," Huang added.

In 2010, Hess signed joint assessment agreements with PetroChina for the Daqing block -- China's largest oil producing block -- and with Sinopec at its flagship Shengli block to evaluate tight oil formations. Hess had said it was hoping to use its expertise in the Bakken Shale play in the US to unlock new potential in China's basins. But the company has faced problems because of different reservoir characteristics between China and the US.

Hess could not be reached at its China office for comment Tuesday.