Saturday, March 28, 2015

Companies quit China natural gas exploration, prices and policies mandated by Communist China gov., complex geology made it difficult for companies to survive

3/27/15, "Here’s Why Royal Dutch Shell And BP plc (ADR) Are Cutting Investments In China,"

"The 50% plummet in crude oil price since June 2014 is forcing energy companies to cut back on their investments in China. With the fall in oil price, profit margins for these companies have fallen sharply, offering lower rates of return. The cost of production in China is considered to be high, plus the country is geologically riskier compared to other countries.

The North Dakota region has become the shale oil hub in recent years. Energy companies began using hydraulic fracturing techniques which allowed them to drill deeper into the surface and extract more oil. After gaining success in the US, energy companies started to explore other options of shale oil.

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) invested substantial amounts in China. The oil giant went on to develop numerous businesses involving production and selling of oil products. The company also signed a production sharing contract with PetroChina Company Limited (ADR) (NYSE:PTR).

This was during the time when crude oil price was above $100 per barrel. Energy companies during this period rushed to China to make investments in the region. Shell’s former CEO Peter Voser in 2013 claimed gas development to be a top priority in the country.

According to the US Energy Information Administration, China has the world’s largest technically recoverable shale gas reserves and with the natural gas demand rising in the area, the country aimed on shifting its dependence to natural gas from coal.

However, Shell faced numerous challenges in the area. The geology surrounding the Chinese shale reserves is very complicated. The companies lack data on the area, which leads to higher costs of shale oil production. Other problems that energy companies face are the shale prices set by the government. This prevents the companies from making adequate profits and discourages investment
According to the Wall Street Journal, one of the energy experts of China, Zhongmin Wang, said that China’s two largest oil companies have made losses amounting to $1 billion on shale through 2013 due to the government policies. In addition, most of the shale areas have higher population densities making it difficult to operate in them.

With the recent challenges faced by the company in terms of lower crude price and costly production, Shell was forced to cut back on its investment activity in the country. According to the Wall Street Journal, Shell now aims on selling its Chinese lubricant brand of business along with its operations. 

In addition, the company has sold the joint venture with PetroChina in Australia which involved exporting liquefied natural gas.

In addition to Shell, many other energy companies have also sold operations in China. One of them is BP plc (ADR) (NYSE:BP). The company is yet face a penalty for its 2010 Gulf of Mexico oil spill and its Russian operations are also hurt due to the US sanctions. With the falling crude oil price, the London-based oil major is finding it difficult to survive in China. As the Wall Street Journal reports, the British oil major has announced to withdraw from three exploratory blocks in the South China Sea, writing off $100 million in exploration costs.

Hess Corp. (NYSE:HES) is also planning to quit a deal that it signed with PetroChina for shale oil exploration. Noble Energy, Inc. (NYSE:NBL) and Anadarko Petroleum Corporation (NYSE:APC) have decided to sell operations in China."


3/26/15, "Oil Producers Sound Retreat From China," Wall St. Journal," Brian Spegele, Beijing

"Shell, others slash investments in country amid falling prices, shaking China’s energy ambitions."

Global oil companies are unwinding some big bets they made on China."...(subscription)

In August 2014, China cut shale gas expectations:

8/7/2014, "China finds shale gas challenging, halves 2020 output target," Reuters

"China has halved the quantum of shale gas it expects to produce by 2020 after early exploration efforts to unlock the unconventional fuel proved challenging, according to an industry website and a government source.

China, believed to hold the world's largest technically recoverable shale resources, is hoping to replicate the shale boom that has transformed the energy landscape of the United States. 

About four years of early evaluations and drilling have so far yielded one large find - Fuling field - in the most prospective gas province of southwest Sichuan, but experts say the Fuling success is hard to repeat due to complex geology and high cost of production....

The revision, which is pending government finalization, would be negative for oil service sector companies that were hoping to cash in on the major drilling activity needed to reach the earlier target.

"This is clearly negative for sentiment for some of the China oil service sector firms such as Anton Oilfield ," said Scott Darling, head of Asia Oil and Gas research of JPMorgan in Hong Kong. "This admission on shale gas reflects the challenges facing China’s natural gas market."...

The government's efforts, led by the Ministry of Land and Resources, to open up the shale gas sector to independent players have had small success, as the blocks the ministry has to offer are of poorer quality and would entail hefty exploration costs.

Attempts by international firms to participate in the shale gas development have not been wholly fruitful either, with Royal Dutch Shell and Hess Corp the only foreign firms that have landed production sharing contracts, while most of them, including Exxon Mobil and BP, have barely progressed beyond the preliminary stage of studying the blocks." 


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