by Aaron Levitt | April 1, 2014 3:00 pm
America is the current leader when it comes to fracking and exacting natural gas and oil from shale. But the red, white and blue isn’t the only country with the geology to support the advanced drilling technique. Several nations can — including Asia’s largest emerging market, China.
The nation features enviable reserve potential, with trillions of cubic feet of natural gas, and an insatiable energy appetite. So investors would be unwise to ignore the potential for a shale gas explosion in China.
Especially because the fuse has already been lit.
While the shale stories in North America, Australia and even the United Kingdom are well understood by investors, China is different. Held back by tough-to-crack geology, there is practically no commercial shale production in the nation.
That’s quickly changing.
The development of China’s shale gas industry has moved forward over the past year and the commercial development of a key field is now ahead of schedule. China’s largest refiner — China Petroleum & Chemical Corp (SNP), or just Sinopec — recently announced that in 2017, production at its acreage in the Fuling shale will yield at least 10 billion cubic meters.
The recent wins in the Fuling shale by Sinopec can only be viewed as the start of something great happening in China.
The nation features 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. 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.
Yet, fewer than 100 wells have been drilled in the nation. In the U.S., that number is roughly 40,000.
China’s difficult-to-crack shale rock and the lack of real advanced drilling technology has been blamed for the delays. In fact, analyst estimations only a couple years ago had a timetable of a decade or more before China could even really begin to tap its vast reserves.
Well, the positive test results by SNP completely change those predictions, and the shale gas revolution in China is finally beginning to take shape.
Policymakers in Beijing had previously set targets of producing around 6.5 billion cubic meters of shale gas next year and between 60 billion and 100 billion cubic meters a year by 2020.
Given the recent positive guidance numbers from Sinopec, analysts now believe those numbers are attainable.
Now, that 100 billion cubic meters is still pretty meager when compared to the United States’ output of shale gas. We managed to frack around 266 billion cubic meters back in 2012. But remember: The shale boom here in the U.S. started as trickle before growing into the behemoth it is today.
China’s shale gas boom is only in the first inning, so it’s not too late to catch most of the game.
As far as China’s own state-backed energy companies, Sinopec is the only one that is taking shale seriously. Rivals like CNOOC (CEO) have continued to focus their efforts elsewhere — namely, the deep water off of China’s coast.
That makes SNP stock the only current, pure Chinese play on the nation’s shale gas.
SNP cut its teeth here in the North America after a series of high-profile acquisitions gave it exposure to Canadian and U.S. shale assets. Technology gained from those buys — as well as a burgeoning partnership with France’s Total (TOT) — have helped it in tackling China’s shale. This, plus its first-mover status, makes it an ideal bet for playing the boom. Plus, SNP trades for just more than 7 times earnings, so you’re very much underpaying compared to the industry average, which runs closer to 22.
The other potential kingpin of Chinese shale gas is international energy major Royal Dutch Shell (RDS.A, RDS.B). The firm has partnered with PetroChina’s (PTR) fully state-owned parent China National Petroleum to begin fracking in the Shaanxi province, as well as implementing a new drilling program in the Sichuan basin. Shell has begun to produce some dry gas, but it’s way behind SNP in terms of actual production.
And given Shell’s recent and continued missteps, it might be a while before the energy firm really begins producing any sort of real gas from China. But it is a “safer” pick for investors concerned about directly owning Chinese stocks — even if it doesn’t provide the same level of oomph when it comes to growing Chinese shale production that SNP does.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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