IHS World Markets Energy Perspective | |
Significance | Shell and China National Petroleum Corp. (CNPC) have signed a joint-venture well-manufacturing agreement which will support CNPC's efforts to improve unconventional drilling efficiencies, while bringing the two companies together, potentially strengthening Shell's access to China's shale gas sector, where the company is aiming to spend USD1 billion per year over the next five years. |
Implications | The deal will pave the way for CNPC to strengthen its unconventional drilling capabilities in the run-up to China's debut shale gas licensing round, under which acreage in the gas-rich Sichuan basin will be offered to domestic companies. |
Outlook | The global alliance agreement between CNPC and Shell paves the way for further collaboration between the two firms, potentially on firming up a joint memorandum of understanding (MoU) on pursuing integrated oil and gas projects in Canada signed in 2010. |
A Global Alliance
At a signing ceremony in China's capital, Beijing, Shell and China National Petroleum Corp. (CNPC) have signed a global alliance agreement underlining a shared intent to pursue mutually beneficial opportunities on a co-operative basis both in China and overseas. The two companies also signed a shareholders' agreement to establish a well-manufacturing joint venture (JV) in which both companies would have a 50% stake. The JV aims to develop an innovative, highly automated well-manufacturing system (WMS) which could significantly improve the efficiency of drilling and completing new onshore wells. The JV agreement remains subject to various corporate and government approvals, and details of the parties' respective contributions to the JV are only expected to be worked out over the coming months.
The well-,manufacturing JV is a mutually beneficial agreement between Shell and CNPC. For CNPC, improving efficiency of onshore well drilling and completions is critical to improve cost competitiveness associated with development of unconventional gas reserves, including tight gas, coalbed methane (CBM) and shale gas in China. Drilling of unconventional gas deposits is set to increase in China as the Ministry of Land and Mineral Resources is preparing to offer unconventional blocks to domestic investors in the Sichuan basin, despite a number of delays to the offering schedule (see China: 5 May 2011: China Sets Standards Ahead of Looming Shale Gas Licensing Round).
CNPC lacks the cutting-edge technologies that IOCs like Shell have deployed so successfully to produce shale gas in North America. For CNPC, a major motivation behind the JV is access to technology. The securing of the agreement on WMS may have been helped by Shell's demonstration of unconventional drilling expertise to CNPC subsidiary PetroChina at the Changbei and Jinqiu tight-gas projects in China. Shell is a global leader in underbalanced drilling—a technique where the pressure in the wellbore is kept lower than the fluid pressure in the formation being drilled. In the Sichuan basin, where complex geological conditions and low drilling speeds have been major problems, underbalanced drilling promises significant benefits in reducing drilling cycles and increasing average drilling penetration rates, while better protecting the reservoirs and hydrocarbon flow conduits. Shell has also deployed soft-torque rotary drilling systems for projects in China, which by reducing drill-string vibration and better controlling the revolutions per minute (RPM) of the drill bit can accelerate drilling efficiencies. While CNPC has recently been deploying horizontal drilling at existing fields to boost recovery rates, the NOC does not have automated directional-drilling technologies ready for commercial deployment. These technologies automatically optimise a range of parameters to boost drilling efficiencies. CNPC appears sorely in need of these technologies as its subsidiary, Chuanqing Drilling Engineering Co., took 11 months to drill its first horizontal shale gas well in China, in a process only completed in March 2011. Exploitation of unconventional gas deposits requires intensive drilling campaigns. Without the requisite technologies, CNPC could face significant financial losses on unconventional projects, while the NOC would face difficulties in meeting ambitious government shale-gas production targets of between 15 and 30 bcm/y by 2020. These considerations are driving CNPC's technical co-operation with Shell.
For Shell, the drilling deal is all about access to China's shale gas acreage. China's shale gas potential is believed to be significant, at 26 trillion cubic metres, of which approximately 1,275 trillion cubic feet are believed to be technically recoverable. China's forthcoming shale-gas licensing round, however, is not open to IOCs, and only certain Chinese companies are allowed to directly bid for blocks. Consequently, IOCs have been vying to gain a position in the shale-gas sector by signing co-operation deals with those Chinese companies permitted to participate in the round. Through these co-operation deals, IOCs have been helping local players to assess the potential of acreage and to drill some pilot wells. Offering technologies to Chinese NOCs has emerged as an important lever for IOCs to transition preliminary co-operation deals into production-sharing contracts (PSCs) for shale gas blocks, and the well-manufacturing JV appears to be no exception. Shell is probably hoping to secure a PSC for the Fushun-Yongchuan block in the Sichuan basin through the deal, where the company's first shale gas well already encountered good gas shows back in March 2011, although it is likely that the company has wider shale gas ambitions in China (see China: 11 March 2011: Shell's First Shale Gas Well in China Encounters Good Gas Shows).
Outlook and Implications
Looking ahead, the global alliance agreement between Shell and CNPC will pave the way for broader co-operation in other projects. Shell is already collaborating with CNPC subsidiary PetroChina to implement the Curtis Island CBM-to-LNG project in Queensland, Australia. In 2010, CNPC also acquired a 35% interest in Syria Shell Petroleum Development, owned by Shell, and the two companies are also jointly exploring for gas in Qatar's Block D. CNPC is looking to collaborate with Shell to gain access to new high-potential oil and gas acreage. Non-operating stakes in unconventional oil or gas assets in North America are likely to be particularly attractive to CNPC, which is looking to add significant reserves and to diversify its asset portfolio to improve long-term competitiveness. Going forward, the two companies may look to progress a memorandum of understanding (MoU) on integrated co-operation of unspecified oil and gas projects in Canada into a binding agreement. Shell will be looking for financial support from CNPC to help realise large unconventional projects, where development costs are often extremely high. By supporting CNPC's drive to secure assets overseas Shell may seek to advance its own access into China's downstream sector, including oil refining and petrochemical projects.
There are additional opportunities for technical collaboration which CNPC may be hoping to pursue through a partnership going forward. Shell has developed sophisticated basin-modelling techniques, which are integrated with seismic imaging and other field data, to help determine where the areas of high gas concentrations are that can be produced in a reservoir. Shell's dual mixed refrigerant (DMR) technologies for LNG liquefaction, which allow more flexible process designs, may also be attractive to PetroChina, which is currently stepping up investment in LNG infrastructure. Meanwhile, Shell's cutting-edge enhanced oil recovery (EOR) technologies could help CNPC sustain output from maturing oilfields in north-east China, which are important to national oil supply security.