Chesapeake Energy Corporation (CHK), Devon Energy Corp (DVN): China Ready to Reap Billions From U.S. Shale Gas Technology

Photo Credit: Flickr/Tomas Roggero

China has spent billions of dollars in the U.S. to snap up joint venture deals with the pioneers of the shale gas revolution. While it would appear on the surface that China is interested in locking up its own supply of natural gas, that might not be the case. Instead, what’s much more likely is that China is using these deals to gain valuable education and access to U.S. shale gas technology. It’s now poised to take what it learned back home so that it can start its own shale gas revolution.

According to estimates by the U.S. Energy Information Agency, China has the most technically recoverable shale gas in the world. If fact, it estimates that China has nearly double the technically recoverable reserves of the U.S. The problem was that it didn’t know how to develop its own reserves, until now.

Chinese oil and gas companies have quietly been investing billions into shale gas leaders like Chesapeake Energy Corporation (NYSE:CHK) and Devon Energy Corp (NYSE:DVN) to gain technical know-how. It has been selectively investing in some of America’s early stage shale plays like the Mississippian and the Utica to gain insight into how shale gas pioneers develop these plays. Sinopec, for example, has been active with both. It signed a billion-dollar deal with Chesapeake Energy Corporation (NYSE:CHK) concerning the Mississippi Lime formation in Oklahoma, and a $2.5 billion deal with Devon Energy Corp (NYSE:DVN) which included the Mississippian as well as the Utica, Tuscaloosa, and emerging plays in Michigan and the Rockies. In both deals, the U.S.-based producer served as the operator while Sinopec provided the capital.

Photo Credit: Chesapeake Energy

While Sinopec undoubtedly wanted to earn a financial return, what it was really after was learning how our technology worked. Now it appears to be ready to take the next step and start to apply what it has learned back on its own turf. One of Sinopec’s next steps is rumored to be signing another joint venture with a company that has a lot of experience working U.S.-based shale basins. This time, it is with oil-field service company Weatherford International Ltd (NYSE:WFT), which would enable Sinopec to focus its efforts on how to develop its country’s vast shale resources.

It won’t be an easy next step. While China is the world’s fourth-largest natural gas consumer, so far the country has only drilled 150 shale gas wells, with minimal commercial success. China’s reserves are locked in much more technologically and environmentally challenged locations due to complex geology, high population density, and water shortages. It needs to move past these challenges in order to start to make progress.