Shell in shale gas deal with China

Royal Dutch Shell RDSB -1.33% PLC has signed the first-ever production-sharing contract to explore, develop and produce shale gas in China, a move that fits in with China's overall strategy to bring technical and operational know-how to the development of its untapped reserves of the unconventional fuel. Although Shell didn't specify contract details in a statement Tuesday, the pact marks a milestone in China's development of shale gas, which has been hindered by the lack of a template showing how production-sharing contracts between foreign and local companies would work. China recently set a target of producing 6.5 billion cubic meters a year of shale gas by 2015 from virtually zero this year and hopes to produce between 60 billion and 100 billion cubic meters a year by 2020—a figure some analysts are skeptical it can achieve. China also has targeted increasing natural gas's contribution to the country's energy mix to 10% by 2020 from less than 5% as part of efforts to cut its dependency on coal, which now accounts for around 70% of its energy mix. Under the agreement, Shell will apply its "advanced technology, operational expertise and global experience" to jointly develop shale gas with state-controlled China National Petroleum Corp., the country's largest energy producer, over a 3,500-square-kilometer area in the Fushun-Yongchuan block in the Sichuan Basin, it said. Chinese companies have been investing heavily in shale projects in the U.S., which pioneered the technology, to build up skills as part of plans to exploit their home country's reserves. Shell has cooperated with CNPC's listed unit PetroChina Co. PTR -2.42% on shale-gas projects for several years. Last month, Shell confirmed it had agreed to sell a 20% stake in a Canadian shale-gas project to PetroChina. In December, PetroChina said its joint venture with Shell led to the discovery of shale gas in China's Sichuan province, some 13 months after it signed an agreement to develop shale gas in the area. China has an estimated 25.08 trillion cubic meters of potentially recoverable shale gas reserves, domestic media reported this month, citing the Ministry of Land and Resources. The U.S. Energy Information Administration said last year that China has an estimated 1,275 trillion cubic feet, or 36 trillion cubic meters, of technically recoverable shale gas reserves, which would make it the largest repository of shale gas in the world. In June, China held its first shale-gas block auction, short-listing six local companies including PetroChina, China Petrochemical Corp., known as Sinopec Group, Shaanxi Yanchang Petroleum Group, China United Coal Bed Methane Co. and Henan Provincial Coal Seam Gas Development and Utilization Co. Foreign companies including BP BP -1.49% PLC and Chevron Corp. CVX -1.46% have also partnered with Chinese companies to search for shale gas in China. Earlier this week, Total SA TOT -1.16% Chief Executive Christophe de Margerie said the French company had reached a pre-agreement with Sinopec to search for and produce shale gas, which it hoped to soon convert into a formal agreement.