Foreign investors pull back from Chinese shale

Pollution in Bejing
Source: WikiCommons, photographer: Yinan Chen

What do Royal Dutch Shell, Anadarko Petroleum Corporation, Noble Energy and Hess Corporation have in common? According to Wall Street Journal they all are pulling back from previously agreed projects in China.

“These companies thought $100 oil was going to stay,” Gordon Kwan, regional head of Asia-Pacific oil-and-gas research at Nomura told WSJ. “They have to prioritize the projects based on returns, and the projects in China tend to be lower return, other things being equal, simply because of higher costs.”

As recently as March 2013, Shell pledged to spend as much as $1 billion a year to explore shale and other resources in China. At the time the company bet hard on shale exploration in the Sichuan basin in cooperation with PetroChina. Now, with the oil prices plunging and exploration in the country proving to be expensive and yielding disappointing results, Shell has announced it will refocus to offshore work with China National Offshore Oil Corporation – a PetroChina competitor. In Sichuan – according to Simon Henry, Shell’s chief financial officer – the company is “still investing but at a lower level than we were.”

Exploring shale in China can be a thankless job. The geology is difficult and the lack of data further increases the costs of exploration. Shortages of water – essential for fracking – is a problem, and so is high population density in the exploration areas. On top of that, government-set pricing system holds down profits. Energy expert Zhongmin Wang estimates in a paper for the Chicago-based Paulson Institute that China’s two biggest oil companies lost nearly $1 billion on shale through late 2013.

The cooling of the enthusiasm foreign companies had for Chinese shale is bad news for China which needs foreign expertise to access their immense shale deposits.

“They need the technology, they need the know-how, they need to diversify their risk and reduce their risk by working with these companies on complicated projects,” said Bo Kong, a University of Oklahoma professor who advised Hess on its China strategy.

China is committed to tapping their shale gas potential, seeing it as an important step towards reaching their environmental targets. The level of air pollution in Chinese cities is so much of a problem that there even is a Twitter feed monitoring air in Bejing – with most entries indicating that the air is “unhealthy”.

China is on a quest to move from coal – currently the most widespread used fuel in the country – to a much cleaner-burning natural gas. Shanghai Daily reported yesterday that China has taken another step towards stopping companies from developing new coal mines with a capacity under 300,000 tons a year, and will offer financial support for coal firms that seek to exploit shale gas.

The new reform measures introduced by The National Energy Administration mean that coal mines under a capacity of 90,000 tons a year will be gradually closed across the country and the government will encourage the relatively developed regions to give up coal mines that produce under 300,000 tons a year.

What is more, new coal mines in eastern provinces such as Shandong and Hebei will curb their production, while new projects in the western region will mainly serve power stations and chemical factories.

The NEA will further encourage local companies to undertake shale gas exploration by offering them tax incentives and capital investments.

Image: polluted sky over Bejing.

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