China's Ascent To Global Energy King

Published in Investing on 5 March 2012

China has more shale gas than the US and less opposition to development.

A version of this article originally appeared on our US site,

Lately, the energy headlines in the US are filled with outcries against pipeline construction and hydraulic fracturing. If you read past that, you will discover that natural gas prices are really low. If you read past that, you may finally realise that China has larger natural gas reserves than America does, and its energy companies are buying small stakes in US operations. Gaining assets and expertise abroad and given the green light for development at home, China is slowly growing into a world energy power.

Gas at home

China's ministry of land and resources pegs its shale gas reserves at 26 trillion cubic metres, or approximately 918 trillion cubic feet. The Energy Information Administration said the country could have up to 1,275 TCF in reserves. Regardless, the smaller of the numbers is still 10 times the estimated reserve of China's conventional gas sources, and a study by the EIA indicates China's technically recoverable reserves are 50% higher than the United States'.

As a top energy user, China has no reason to hesitate when it comes to developing its reserves, and the close ties between business and state in the country mean that things are moving full speed ahead.

The Chinese government recently approved shale gas as an independent mining resource in January, allowing more Chinese firms to legally develop the resource. Foreign companies may not participate, but they may partner with Chinese companies.

Gas -- and experience -- abroad

Those partnerships have been crucial to developing expertise within Chinese energy companies such as PetroChina (NYSE: PTR.US), CNOOC (NYSE: CEO.US) and Sinopec (NYSE: SHI.US).

At the beginning of the year, Sinopec inked a deal with Devon Energy (NYSE: DVN.US) for a one-third interest in five of Devon's US properties. The properties span the United States from Appalachia to Colorado, and feature a mix of different geologic formations rich in dry and wet gas. Talk about exposure to the industry.

Last year, CNOOC coughed up $1 billion to get in on a joint venture with Chesapeake Energy (NYSE: CHK.US), the second-largest producer of US natural gas.

PetroChina has been active in Canada, signing a deal with Royal Dutch Shell for a 20% stake in its Montney Basin natural gas project. The play is estimated to contain 1 billion cubic feet of gas.

China's first wells

With the help of Royal Dutch Shell, the first horizontal shale gas well appeared in Sichuan province in April of last year. Since then, China's three largest energy companies, Sinopec, CNOOC and the China National Petroleum Co., have all started the exploration and production process. Sinopec and CNPC have both completed more than 10 wells, while CNOOC -- China's largest offshore producer -- has started seismic operations in Anhui province. It marks the first on-land foray for CNOOC. The early well results show promising, though not commercial level, results.

In the meantime, Chinese companies look to improve their fracking faculties via another acquisition. Sinopec and CNOOC are competing with Saudi Arabia's state-owned Saudi Aramco for a 30% stake in Frac Tech Holdings, a US shale gas services company. The deal is likely to be valued at around $2 billion.

Gas from coal

Another small US company is helping China produce even more gas, this time from a coal-to-gas conversion process known as hydromethanation. GreatPoint Energy, a Massachusetts-based start-up, will build a plant in Western China that will produce 30 billion cubic feet of natural gas a year by 2015, and 1 trillion cubic feet a year when it is running at full capacity. The plant is expected to meet 0.5% of China's energy needs on an annual basis. Sinopec will build the pipeline infrastructure to bring the gas to markets in the East.

Foolish takeaway

The development of China's natural gas reserves may have a significant effect on the global economy. Little-picture outlook: an increased emphasis on natural gas will affect coal consumption, but it will also affect liquified natural gas exports in places like Qatar and Australia, a country that has placed a very large bet on LNG. Big-picture outlook: a formidable economy frees itself from the yoke of dependence on foreign energy sources. And who can say for sure what that will ultimately result from that sort of freedom.

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