PetroChina Needs Time on Shale Gas, Looks Abroad: Energy

PetroChina Co. (857) may take five years to figure out ways to unlock the world's largest natural-gas reserves trapped in shale rock, meaning China must keep buying overseas energy assets to fuel the second-biggest economy.

"We still have a long way to go in turning possible shale resources into recoverable reserves," Zhou Mingchun, chief financial officer at China's largest oil and gas company, said in an interview in Beijing. PetroChina will pursue energy assets "wherever and whenever they become available."

China, estimated to hold triple the shale reserves of the U.S., has yet to produce the fuel commercially because its drillers lack technology and face tougher geology. Explorers including Cnooc Ltd. (883) have bid for $100 billion of energy assets from Australia to Canada since 2008, including so-called unconventional resources, to boost reserves and gain expertise.

"We'll need three to five years to develop a full-fledged method to overcome a series of challenges, including looking for gas and recovering gas, before we decide on the next step," Zhou said May 29 at the head office of the company thats ranks as the world's third largest by market value. "We're taking a proactive and cautious stance."

PetroChina's parent, China National Petroleum Corp., tapped Royal Dutch Shell Plc (RDSA) for help in sinking the nation's first horizontal well last year. Ties were strengthened in February when PetroChina agreed to buy a 20 percent stake in Shell's Groundbirch shale-gas project in Canada.

Fracking Know-How

Such alliances serve to transfer expertise on hydraulic fracturing, or fracking, which involves blasting water, sand and chemicals underground to release gas from sedimentary rock.

A lack of technology at home prompted state-run Cnooc and China Petrochemical Corp. to invest more than $5.7 billion in unconventional oil and gas assets overseas. China Petrochemical, known as Sinopec Group, also held talks with Chesapeake Energy Corp. (CHK) (CHK) and its North American competitors about acquiring shale.

PetroChina has "no contact with Chesapeake in terms of mergers and acquisitions," Zhou said. Still, "both sides have paid attention to each other," he said, without elaborating.

China holds 25.1 trillion cubic meters of exploitable shale reserves, the country's Ministry of Land and Resources said March 1, citing a nationwide survey.

The U.S. Energy Information Administration previously said China may hold 1,275 trillion cubic feet (36 trillion cubic meters) of technically recoverable gas, 12 times the country's conventional gas deposits, according to an April 2011 report. That's almost triple the 482 trillion cubic feet in the U.S., according to a Jan. 23 estimate by the EIA. It didn't give a revised figure for China.

Shale Boom

China is seeking to emulate the U.S., where a shale boom made it the world's biggest gas producer and upended global energy markets. The U.S. pumped 96 billion cubic meters in 2009, overtaking Russia as the largest gas provider. Output surged to 142 billion cubic meters in 2010, causing prices to slump.

Shale formations in China are different from those in the U.S. and techniques need to be adapted to its geology and pipelines built to transport the fuel, said Neil Beveridge, an energy analyst at Sanford C. Bernstein & Co. in Hong Kong.

"There's tremendous potential, but the time now is really about understanding their resources and how China can develop them efficiently, instead of just throw money at the problem as quickly as possible," Beveridge said by telephone yesterday. "The trick with shale is to get costs down to the point where it's attractive to develop."

Collaborate With U.S.

PetroChina is working to clarify the size and geography of Chinese shale resources and conducting experiments to develop its engineering and technical skills, CFO Zhou said. The company wants to boost cooperation with its U.S. peers to learn about fracking technology, which is a "killer tool," he said.

Shares in PetroChina, which trails only Apple Inc. and Exxon Mobil Corp. (XOM) (XOM) in market value, have gained 1 percent in dollar terms in Hong Kong this year compared with a 9.5 percent drop in the 63-company Bloomberg World Oil and Gas Index.

The company targets output of 1 billion cubic meters of shale gas a year by 2015, PetroChina President Zhou Jiping said March 29. China aims to pump 6.5 billion cubic meters annually by 2015 and 60 billion to 100 billion cubic meters by the end of the decade, the National Development and Reform Commission said, citing a plan drafted by the National Energy Administration.

China's output will reach 23 billion cubic meters in 2020, short of the government's target, according to the average estimate of seven analysts surveyed by Bloomberg in February.

Sinopec Group will start pumping the nation's first shale gas from a project in Sichuan province next month, Caixin magazine reported May 15, citing the company.

State Auctions

The government first auctioned exploration blocks last June and awarded blocks to two of the six state-owned companies that were invited. A second auction, delayed at least twice, will be open to privately owned local producers. Overseas companies will remain barred from bidding directly and can invest in ventures led by local explorers.

Even as China's three largest energy companies develop its shale reserves, they continue to snap up assets globally.

PetroChina, Sinopec Group and Cnooc accounted for $68.3 billion of the $100 billion of overseas energy assets that Chinese companies bid for since 2008, according to data compiled by Bloomberg. PetroChina alone bid for $13.1 billion of oil and gas fields and refineries, the data show.

"The expansion of international operations has always been a very important and strategic direction," CFO Zhou said. "We will actively pursue opportunities wherever and whenever they become available, as long as they fit our needs, conform with our strategy and are reasonably priced."

Imports Jump

PetroChina's proven oil reserves totaled 11.1 billion barrels in 2011, a 4.2 percent decline from 2006, company data show. China's oil imports surged 75 percent to 254 million metric tons in the period, according to customs information.

"Judging by the steady rise in China's oil imports over the past decade, the acquisition pace had been too slow, too cautious," Gordon Kwan, head of energy research at Mirae Asset Securities (HK) Ltd., said by e-mail. "PetroChina should leverage its huge balance sheet to do bigger deals in order to meaningfully reduce dependence on foreign crude, and shale gas is not the answer in the short term."

Overseas Ambitions

PetroChina wants half its oil and gas output to come from overseas by the end of the decade, Chairman Jiang Jiemin said in March. Less than a 10th now comes from abroad. The company plans to invest at least $60 billion by 2020 to buy foreign assets.

On top of efforts to acquire reserves and build a global oil-trading business, PetroChina is seeking to forge alliances with its counterparts in oil-rich nations to invest in ventures in China, Zhou said.

The company is investing with Russia's OAO Rosneft to build a 13 million-ton-a-year oil refinery in China's northern port city of Tianjin. Russian companies will supply 70 percent of the crude for the facility, former First Deputy Prime Minister Igor Sechin said in September 2010.

"We are especially looking for opportunities to cooperate with state-owned companies from resource-rich countries," Zhou said. "That way we can share our resources and control risks."