Sep 9, 2013 | 10:16 GMT

6 mins read

In China, an Opportunity for More Progress in Shale Gas Extraction

In China, an Opportunity for More Progress in Shale Gas Extraction   Read more: In China, an Opportunity for More Progress in Shale Gas Extraction
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Now that China's Shaanxi Yanchang Petroleum has bought Canada's Novus Energy, Beijing has taken one step closer to its still-distant goal of large-scale, commercialized shale gas extraction. Although Novus is a relatively small company, it specializes in hydraulic fracturing and horizontal drilling, which it used to exploit reserves outside Canada's massive oil sand deposits. Shaanxi will familiarize itself with these extraction methods, but though its newfound expertise eventually will help it perfect its techniques, China is still years away from being able to produce as much shale gas as it would like. 

Shaanxi Yanchang Petroleum is China's fourth largest oil and natural gas producer, behind only China Petroleum & Chemical Corp. (also known as Sinopec), China National Offshore Oil Corp. and PetroChina — commonly referred to as the "Big Three" national oil companies. Shaanxi Yanchang Petroleum is the only company other than the Big Three that has the petroleum exploration rights. Other companies must partner with one of the four.

But unlike the Big Three, which are owned either by the central government or by subsidiaries of companies owned by Beijing, Shaanxi Yanchang Petroleum is owned entirely by the Shaanxi provincial government. So while the Big Three operate throughout China and abroad, Shaanxi Yanchang Petroleum's focus is much more local. In fact, the company accounts for roughly 16 percent of the provincial government's revenues. As the firm grows, it may continue to expand outside Shaanxi province and even outside China, but it will always contribute to provincial revenue streams in furtherance of provincial political goals.

In China, an Opportunity for Progress in Shale Gas Extraction

China's Shale Basins

Aside from local political considerations, there are other factors motivating Shaanxi Yanchang Petroleum. First, the company is attempting to break up the Big Three's near-complete control of the industry — something that Beijing has recently permitted companies to do to other state-owned enterprises as part of its drive toward shale gas development. Beijing also has begun cracking down on corruption in PetroChina's parent company, China National Petroleum Corp., to further reform the oil sector.

Second, Shaanxi Yanchang Petroleum is considering its own position. Over the past decade, the company has increased oil and natural gas production dramatically, and it has already begun expanding outside Shaanxi somewhat. For example, it plans to build a oil refinery in the city of Dalian that would have a production capacity of 200,000 barrels per day, and the $307 million purchase of Novus is the company's first overseas acquisition. While the ultimate objective of the acquisition is to exploit shale gas resources, the technological expertise the company will acquire from Novus can be applied immediately. Indeed, it can be used in tight oil and tight gas formations — hydrocarbon reservoirs with low permeability — and to extend the life of aging fields.

In the United States, small independent energy companies were the initial driving force behind the shale gas revolution. Because they lacked the resources to distribute funds to other areas, these companies were compelled to focus on the assets they already had. The result was a trial-and-error process that resulted in a mastery of hydraulic fracturing and horizontal drilling techniques. Shaanxi Yanchang Petroleum and its namesake province, which sits atop one of China's largest shale gas deposits, the Ordos Basin, believed to possess from 15 trillion to 18 trillion cubic meters of shale gas, may similar drive production in China.

Limited Exposure

In many ways, Shaanxi Yanchang Petroleum has been at the forefront of shale extraction in China. The company has been exploring shale possibilities since 2008, and the country's National Development and Reform Commission established the Ya'nan National Continental Shale Gas Demonstration Zone, a 1,500-square-mile region in Shaanxi province, in 2012. Moreover, Shaanxi Yanchang Petroleum has been one of the more successful Chinese companies at advancing and developing shale gas extraction techniques. In November 2012, the company hydraulically fractured a horizontal shale gas well, becoming the first Chinese company to do so on its own. The company has since drilled 16 shale gas wells, fracturing half of them.

But even as Shaanxi Yanchang Petroleum sharpens its technique locally, acquiring foreign firms like Novus with expertise methods for shale gas production — as well as those for sustaining oil and natural gas production from conventional plays — is a stated goal. While Novus is not a shale gas producer, it focuses on using horizontal drilling and multi-staged hydraulic fracturing in Canadian tight oil formations — techniques similar to those needed for shale gas extraction.

Despite partnering with foreign oil companies such as Royal Dutch/Shell and ConocoPhillips, some Chinese companies have found it difficult to master and apply these technologies. The Big Three, for example, have acquired seven shale-related assets in North America since 2010. However, foreign firms served as the operators in each of those purchases, limiting Chinese technological exposure. In addition, those contracts had rare provisions that barred the temporary reassignment of workers, preventing China from sending its workers to gain hands-on experience in North American facilities.

This was partly because in North America, Chinese oil and natural gas acquisitions have become politically sensitive. The provisions to limit Chinese involvement likely were included in the contracts to ensure that Washington and Ottawa would sign off on them. Indeed, China National Offshore Oil Corp. was to become the operator of the Canadian firm Nexen's deep-water assets in the Gulf of Mexico before the Obama administration forced the Chinese company to give up operational control. The company was hoping to gain deep-water drilling expertise and experience. Ottawa has also said that there would be no more approvals of Chinese acquisitions involving Canada's vital oil sands. However, unlike previous purchases in Canada, the Novus deal does not involve oil sands, and Shaanxi Yanchang Petroleum differs in that it is owned by the province, not the Chinese central government.

While details of the Novus deal have not been made public, the company's assets are located solely in Canada, so the takeover does not need approval from Washington. Shaanxi Yanchang Petroleum will likely be able to gain operator status and, more important to the company, have its employees work in the Canadian fields, thus gaining valuable experience to take back home.

Shale gas extraction in China remains a long-term endeavor, but Shaanxi Yanchang Petroleum's shale success at home, and now potentially abroad, is notable. Other regions, especially the Sichuan Basin, have many of the same political motivations as Shaanxi, but Shaanxi's provincial government has more direct influence on developing its own resources. Shaanxi Yanchang Petroleum has emerged as one of the more advanced players in shale gas development, and its growth corresponds with Beijing's long-term goal of developing shale gas as a way to foster greater competition in this lucrative industry. 

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