At this point, it’s no secret that China has an insatiable appetite for all things commodity. From corn to steel, the emerging Asian Dragon is one of the main drivers of the natural resources market.
That holds true for the energy sector as well. The nation continues to ramp up its energy requirements as society begins to modernize and become more consumer-based. China is one of the main reasons why so many firms in the U.S. are chomping at the bit to build new liquefied natural gas exporting facilities on the Gulf Coast.
After signing one of the first agreements to tap China’s own shale bounty, the integrated giant has ratcheted its efforts up a notch. It has committed some serious capital to direct production in the emerging market — a decision that could very well change the LNG export market and be a huge money market for investors going forward.
An Abundance of Shale Reserves
While the shale stories in North America, Australia and even Argentina are well understood by investors, China is different. Held back by tough-to-crack geology, there is practically no shale production in the nation.
That’s a real shame considering that China holds some of the richest deposits of shale gas and oil on the planet with roughly a fifth of all shale resources and the largest technically recoverable assets, according to the Energy Information Administration (EIA). With just over 25 trillion cubic meters of exploitable onshore shale-gas reserves and total reserves estimated at 134.42 trillion cubic meters, the potential for a shale-gas renaissance in China is huge.
That potential, however, has yet to be fulfilled.
The nation’s Ministry of Land and Resources reported that for all of 2011, the Asian Dragon only invested a total of 1.4 billion yuan — about $222 million — in the domestic shale-gas sector. That equates to drilling only about 50 total wells. By comparison, the U.S. drilled about 1,300 wells a month during 2011. Enter Shell’s ambitious plans.
Back in March, the ministry and other government officials released China’s new shale-gas development program under the nation’s latest five-year economic plan. The program targets a commercial output of 6.5 billion cubic meters per year by the end of 2015 and 60 billion cubic meters per year by 2020. By partnering with state-owned giant PetroChina (NYSE:PTR), Shell became one of the first western energy firms to begin a pilot drilling program in the nation.
Those test wells are apparently proving to be quite successful, too, as Shell announced that it plans to invest over $1 billion a year in order to transform China’s shale energy market.
Shell is already a major supplier of liquefied natural gas (LNG) to China from its global fields in Australia and Qatar. Now, the major is taking a direct approach to fulfilling China’s growing energy needs. Spending $1 billion a year certainly will substantially increase production in the nation.
And the company also plans to build a $12.6 billion refinery and petrochemical complex in eastern China to take advantage of the newly tapped cheap abundant natural gas in the nation — a project that will become the single largest foreign investment in China.
Finally, Shell has plans to relocate its global business unit for coal-bed methane — gas trapped in coal seams — to China later this year and establish a global research hub for unconventional gas and oil. China expects coal-bed methane to meet 15% of the country’s needs by 2020.
A Big First Step
While Shell does face some competition from its integrated peers — Exxon Mobil (NYSE:XOM), Total (NYSE:TOT) and Chevron (NYSE:CVX) have all made moves to enter the nation — the Anglo-Dutch firm’s status as the first mover is key. The only real competition is Italian major Eni (NYSE:E), which recently signed a memorandum of understanding with Sinopec (NYSE:SHI) to look at China’s various shale assets.
With China’s use of natural gas set to triple over the next ten years and oil demand set to make up more than a third of the world’s total, Shell is setting itself up to be the premier supplier to emerging giant. Its direct investments in the nation will give it a leg up over its peers.
That will put Shell in a very good position to continue profiting from China’s — and Emerging Asia’s for that matter — growth. After all, why spend the money to build expensive LNG import terminals, pay shipping fees, etc. when you can produce natural gas right here at home?
Shell’s announcement to invest oodles of money into China’s shale assets could also throw a wrench into the plans of all of those U.S. firms building LNG export facilities. While Cheniere Energy (NYSE:LNG) will most likely find other buyers for its Sabine Pass exported liquefied natural gas, it’ll be interesting to see just how much of that fuel bound for China finds other buyers.
Overall, Shell’s decision to invest directly in China’s energy markets and tap its shale reserves can be seen as great win for investors and the company. While it won’t be an easy road to travel, it’s a necessary plan to insure future growth and profits from the world’s largest consumer of energy.
As of this writing, Aaron Levitt was long RDS.A and RDS.B.