International oil companies like Royal Dutch Shell PLC (RDSA.LN, RDSA) are betting they can tap unconventional sources of natural gas in China and copy their success in the U.S., where new techniques have uncovered vast domestic supplies that are reducing reliance on imports for decades to come.
International oil companies like Royal Dutch Shell PLC (RDSA.LN, RDSA) are betting they can tap unconventional sources of natural gas in China and copy their success in the U.S. , where new techniques have uncovered vast domestic supplies that are reducing reliance on imports for decades to come.

"There is a big expectation building up, clearly, given the fundamental change in the domestic North American gas market," Shell Chief Executive Peter Voser told reporters Tuesday. New sources of natural gas have added supplies in North America equivalent to about a century's worth of use, he said.

" China has similar geology which could therefore have a significant potential," Voser said.

Shell Tuesday announced plans to jointly develop and produce natural gas in western China's Sichuan basin with state-owned China National Petroleum Corp.

(This story and related background material will be available on The Wall Street Journal Web site, WSJ.com.)

Under the 30-year contract, Shell and CNPC will appraise and potentially develop reservoirs of one type of unconventional gas called "tight" gas in an area of approximately 4,000 square kilometers in the Jinqiu block of central Sichuan Province , the statement said.

Tight gas is natural gas contained in rock that must be broken open before it can flow easily to production wells. Development of unconventional gas reserves such as tight gas, shale gas, or coal-bed methane gas have unlocked huge new domestic energy sources in North America, profoundly re-balancing the global energy equation. The world's biggest natural gas fields in the Middle East and elsewhere that had expected the U.S. to be their main customer must find buyers elsewhere, causing a domino effect with consequences as far as Russia.

One buyer has been China , where natural gas demand has outpaced domestic supply from conventional gas fields. China wants more gas as a cleaner alternative to burning coal, the source of three-quarters of its power and a major pollutant. China suffered widespread gas shortages last winter.

"This is another step forward for Shell's world-wide tight gas strategy, building on our technology and production track record in China and elsewhere," said Malcolm Brinded, executive director of Shell's upstream international division. "The agreement will strengthen our partnership with CNPC in developing cleaner energy to meet China 's growing needs."

This is the second deal between Shell and CNPC announced this week, underscoring growing collaboration between China 's oil companies with their international competitors and the strong interest in unconventional gas supplies. On Monday, Shell and PetroChina Co. (601857.SH, PTR), which is the Hong Kong-listed unit of CNPC, agreed to buy Australian coal seam gas producer Arrow Energy Ltd. (AOE.AU) for $3.15 billion, pending approval. Coal seam gas is another form of unconventional gas supply.
Also, a person familiar with the matter said Tuesday that BG Group PLC (BG.LN, BRGYY) and China National Offshore Oil Corp. (0883.HK, CEO) plan to sign an agreement to buy liquefied natural gas from Australia Wednesday. The deal comes nearly a year after Cnooc agreed on initial terms for the 20-year purchase of 3.6 million metric tons of LNG annually from BG's proposed export terminal in Queensland state, which will be fed by coal seam gas. It isn't known if the terms of the binding deal to be signed Wednesday differ from the preliminary agreement. Shell already has a China gas project with CNPC, the state-owned parent of Hong Kong-listed PetroChina Co., in Changbei, in Shaanxi province.

Commercial production in Changbei began in March 2007, supplying 3 billion cubic meters of gas a year to Beijing and other cities in eastern China .

Shell also signed a joint assessment agreement with PetroChina in November 2009 for shale gas cooperation in Sichuan . Assessment work in the Fushun block that covers another area of approximately 4,000 square kilometers started in January this year.

Voser cautioned it's still too early to tell just how much more gas China has. "We're just starting our exploration phase," he said.

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