China's Sinopec Group Moves into U.S. Shale Gas

China Petrochemical Corp, China's second largest oil producer has moved into U.S. shale gas in large fashion.

China Petroleum, its global arm Sinopec Group will invest $2.2 billion for one-third of five new venture blocks owned by Devon Energy Corp, the company said in a statement. Devon (NYSE: DVN) is a US-based independent oil and gas producer.

The move is intended to leverage the U.S, company's cutting-edge shale gas exploration technology, as part of China's plan to extract the largely untapped clean fuel.

The technology for extracting gas trapped between layers of shale is still developing and China lags in the field.

The acquisition is Sinopec's first attempt to enter the upstream exploration and development business in the US.  It would also assist the Chinese company to explore for oil and gas in the U.S.

The five new venture blocks assembled by Devon are the Tuscaloosa Marine Shale, Niobrara, Mississippian, Ohio Utica Shale and the Michigan Basin.

Through 2012, the companies are expected to drill about 125 gross wells in the five plays, the US company said.

SIPC would make a $600 million cash payment upon closing, Devon said.

It also said that $1.6 billion would be paid in the form of a drilling carry. The entire $1.6 billion carry would be realized by the end of 2014, according to Devon's statement.

Drilling carry is an accounting arrangement used in energy joint ventures. One partner - in this case, Sinopec - finances the drilling expenses of the other during a defined period.

Devon said it would serve as the operator and be responsible for commercially marketing all production from these plays into the North American market.

Chinese reserves

China, which is estimated to have 36.1 trillion cubic meters of technically recoverable shale gas reserves, is expected to hold its second shale gas auction this month. The first auction was held in June.

In the first auction, Sinopec was one of the winning bidders, securing rights to explore the Nanchuan block, which covers a total area of 2,198 sq km in Sichuan and Guizhou provinces.

The company said that it planned to invest about 590 million yuan ($93.7 million) in the block during the survey period, which would last three years.

China said on Friday that it would categorize shale gas as a separate type of natural mineral resource, underscoring the strategic importance of the fuel resource. Previously, shale gas was included in the general oil and gas category.

The US shale gas revolution has helped remake the energy landscape in the country and reduce its dependency on energy imports.

Industry experts said that the shale gas industry remains in its infancy in China, and its near-term development wouldn't be comparable to that in the US, given China's shortfalls in technology and more complex geological structures.

Analysts have noted that China's shale gas deposits are located at about twice the depth of US deposits, making extraction more difficult and expensive.