China’s giants look to natural gas as crude prices remain under $40 per barrel

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Source: DollarPhotoClub

Energy giant BP has entered into its first production sharing contract (PSC) with China National Petroleum Corporation (CNPC) for shale gas exploration, development and production in the Neijiang-Dazu block in the Sichuan Basin, China. Meanwhile, China’s thrid-biggest refiner Sinopec has committed to double its natural gas output by 2020.

The BP/CNPC contract, which is a part of a framework agreement on strategic cooperation that was signed last October, is for exploration of shale in an area of approx. 1,500 sq km. CNPC will be operator for this project. Other elements of the framework include possible future fuel retailing ventures in China, exploration of oil, global LNG and carbon emissions trading opportunities, as well as sharing of knowledge around low carbon energy and management practices.

In a company statement, BP Group Chief Executive Bob Dudley said that China continues to be an important part of BP’s portfolio: “We are pleased to reach this significant milestone as part of our strategic partnership with CNPC, building on our successful cooperation in and outside of China. We are looking forward to working together with CNPC on technology, operational and subsurface techniques in unconventional resources. We will bring our worldwide experience to our first unconventional gas project in onshore China with CNPC. We will combine this with CNPC’s knowledge and experience to bring gas to China’s growing clean energy market.”

Analysts have noted that the timing of the deal – at a time when oil and gas prices remain depressed and the U.S. has started shipping its ample supplies of shale gas abroad – might position China as a serious contender in an increasingly crowded LNG markets.

China’s commitment to shale has recently been reiterated when the country’s other state-owned giant, China Petroleum & Chemical Corporation – better known as Sinopec – to double annual gas output to 40 billion cubic meters by 2020.

According to the company’s Chairman Wang Yupu, a wave of new discoveries will make it possible to achieve the new target, which includes producing 29.5 billion cubic meters of conventional natural gas, 10 billion cubic meters of shale gas and 500 million cubic meters of coal-bed methane by 2020, almost doubling its 2015 gas output of 20.8 billion cubic meters.

The 2020 target doesn’t include 2 billion cubic meters of annual output from a shale gas production facility in southern Sichuan province that Sinopec will begin building this year, President Li Chunguang said at the same press conference in Hong Kong on Wednesday.

Since a price of $60 a barrel is needed for all of Sinopec oil fields to be profitable, the company has decided to pursue expansion in natural gas instead – Wang Yupu said.

Sinopec’s total upstream production last year fell 1.7 percent to 471.91 million barrels of oil equivalent, with crude output down 3.1 percent to 349.47 million boe – a stark contrast to 8.4 percent and 8.5 percent year-on-year increases in upstream and crude output in 2014. According to its annual statement released on Tuesday, the company is planning to cut crude production by 5 percent in 2016 as a result of cutting capital expenditures by 10.6 percent from 2015.

Natural gas output rose 2.6 percent from 2014 to 734.79 Bcf last year, slower than 8.5 percent growth in 2014.

Sinopec said it plans to produce 332 million barrels of crude and 865 Bcf of gas this year: “In development, we will press ahead with implementation of dynamic decision-making and operating mechanisms and cut low-efficiency production and high-cost enhanced oil recovery activities to optimize our production structure,” it said.

Source: Bloomberg, Platts.

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