Will Chinese Pollution Lead to Coal-to-Gas Switching? – Schlumberger Limited. (SLB), Baker Hughes Incorporated (BHI), Halliburton Company (HAL)

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Last summer I had the opportunity to sit in on a small business round table with the state director for Sen. Pat Toomey of Pennsylvania. His state director had a lot to say about the economy and especially about regulations. He also had some pointed words for the EPA, with the most eye-opening comments being about coal.

For those of you who don’t know, Pennsylvania is a coal state, although more recently it has begun to tap into the massive natural gas resources of the Marcellus Shale. That being said, coal is still important to the state’s economy, and in the view of the senator, the EPA was overstepping its bounds and hurting the industry. He said: “[We] now ship coal to China to burn in plants using 1890’s technology while we are forced to close plants there in the U.S. because they are using 1990’s technology.”

Let that statement sink in for a moment. While there certainly are some politics behind it, the truth of the matter is that coal-fired power plants in China are not as advanced as those operating here in the U.S. Is it now any wonder why China’s recent air pollution scores are off the charts? In fact, the region’s air pollution measured a score of 755 on the air quality index, with 300-500 considered as dangerous.

The problem is not likely to go away any time soon, especially in light of the fact that China accounts for half of the world’s coal usage. In fact, the country is increasing its use of coal, with imports becoming more vital. Last year China set an all-time high with 289 million tonnes of coal being imported, a 30% rise over the prior year. The country is in the midst of one of its coldest winters in nearly 30 years, which has led to an increase in electricity generation with a coinciding drop in coal stockpiles. Still, given the pollution problem isn’t it about time the country joined the U.S. in switching away from coal?

It’s not like the country doesn’t have the reserves; in fact, it’s third in the world in terms of recoverable natural gas reserves. The problem is that a bulk of those reserves are found in unconventional sources such as shale, coal-bed methane, and tight gas formations. These are more expensive to extract than from conventional sources.

Unfortunately for China, its difficulties in extracting that gas run deeper than just the costs of extraction. One of the keys to hydraulic fracturing is of course water, lots and lots of water. With most of China’s gas found in more arid climates, this limits the country’s ability to exploit these resources with current extraction technologies. Of course where there is a will, there will be a way.

One company that’s focusing more on the onshore unconventional opportunities in China is Schlumberger Limited. (NYSE:SLB) . The company has made several strategic moves in the country over the past year via joint ventures. It also launched the Schlumberger China Petroleum Institute last year which will be engaged in research and development projects with Chinese companies, especially those involved in unconventional resources.

Schlumberger isn’t the only oil-field services company working on the problem. Baker Hughes Incorporated (NYSE:BHI) has its own strategic partnership to set up a research center for unconventional energy in China. In addition to this, the company and its Chinese partner will invest in the development of technologies and solutions specific to China’s unconventional hydrocarbon market.

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