Energy & Resources

Pioneering move

Sinochem heads to the US to further its domestic shale ambitions

Pioneering move

Shopping for shale

Located in southwestern Texas, the Spraberry Trend is a large oil field in the Permian Basin, an area rich in oil and natural gas. First discovered in the 1940s, as an oil field it was soon subject to a flood of speculators. Promoters went to extravagant lengths to attract new investors. One source interviewed for the book Wildcatters: Texas Independent Oilmen describes how some of the salesmen “had a whole bunch of models come out to the rig, every one of ‘em nude… I suppose they sold a lot of interests [in the well].”

Half a century later and the Spraberry Trend is still attracting serious interest, although this time for shale resources. One of the largest recent investments came from China, as Sinochem Corporation announced that it would pay $1.7 billion to acquire a 40% interest in the Wolfcamp shale gas field in the south of Spraberry Trend, reports National Business Daily.

The Chinese energy and chemicals conglomerate is purchasing the stake from Pioneer Natural Resources, and it bears mention as the firm’s first overseas acquisition of a shale oil and gas field. Pioneer will stay on the scene, handling drilling, operations and sales.

The deal is part of Sinochem’s effort to catch up with its domestic rivals. PetroChina has already started developing its shale gas business in the provinces of Sichuan and Yunnan, for instance, while Sinopec has drilled five wells in Guizhou, Anhui and likewise in Sichuan.

Compared to its larger peers, Sinochem has fewer domestic oil and gas reserves to exploit, making the move to expand overseas a more pressing choice. An additional advantage to working with a foreign partner is the opportunity for technology transfer. Wan Xuezhi, an energy analyst at CIConsulting, told National Business Daily that the deal will allow Sinochem to bring advanced US shale gas know-how and equipment back to China. A lack of experience has hindered the development of the Chinese shale gas industry to date, Wan suggested.

The international push is not atypical for Sinochem. Its relatively sparse resources within China mean that it has often had to look abroad for opportunities. For example, in the 1980s, it was a very early investor in the US fertiliser industry, at the time China’s largest overseas investment, reports the China Economic Times.

In fact, Sinochem’s original mandate was the import and export of chemicals and fertilisers (for more background on the firm and its push into oil refining, see WiC7).

China Economic Times also points out that Sinochem has good relationships with several of the major oil-producing countries. As of the end of 2011, it enjoyed oil and gas interests in a wide range of locations including Brazil and Colombia, the United Arab Emirates, Indonesia and (more trickily) Syria.

China is thought to have the world’s largest shale reserves but the industry has been slow to take shape. More recently the pace has picked up and the Ministry of Land and Resources held its second auction for licences in December. A total of 83 companies made 152 bids, reports the broadcaster Al-Jazeera, with the more attractive plots drawing bids of Rmb1 billion ($160.4 billion) and more.

The government has ambitious targets for shale oil and gas production: 6.5 billion cubic metres by 2015, with a further goal of 100 billion cubic metres by 2020 (by comparison America produced 151 billion cubic metres in 2010, according to the website of the US Energy Information Administration).

Whether the target can be achieved is open to question, although deals like Sinochem’s purchase of Pioneer in Texas are clearly designed to help Chinese firms get up-to-speed as quickly as possible.

“This is not going to be as easy as everybody thought three years ago,” Chris Faulkner, chief executive of Brietling Oil and Gas told Al-Jazeera. “I think it is starting to sink in that is a huge challenge for China.” (For more on China’s shale resources, and the challenges of extracting them see our Talking Point in WiC151.)

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