Chinese companies still lag behind in technology for extracting gas trapped between layers of shale. Analysts have noted that China's shale gas deposits are located at about twice the depth of US deposits, making extraction more difficult and expensive. [Photo / China Daily]

Move will give company access to high-end technology and experience

NEW YORK / BEIJING - China Petrochemical Corp, or Sinopec Group, the country's second-largest oil producer, has announced its first foray into shale gas assets in the United States.

Sinopec's international practice arm, Sinopec International Petroleum Exploration & Production Corp (SIPC), will invest $2.2 billion in exchange for one-third of five new venture blocks owned by Devon Energy Corp, according to a statement on Tuesday by Devon, a US-based independent oil and gas producer.

The move is intended to obtain the US company's cutting-edge shale gas exploration technology and management experience, as part of China's plan to extract the largely untapped clean fuel.

The technology for extracting gas trapped between layers of shale is still developing and China lags in the field.

First attempt

The acquisition is Sinopec's first attempt to enter the upstream exploration and development business in the US.

A Sinopec media representative in Beijing said that the acquisition would help the Chinese company explore for oil and gas in the US, and it hoped to accelerate the commercial development of the project through cooperation.

The five new venture blocks assembled by Devon are the Tuscaloosa Marine Shale, Niobrara, Mississippian, Ohio Utica Shale and the Michigan Basin.

Through 2012, the companies are expected to drill about 125 gross wells in the five plays, the US company said.

SIPC would make a $600 million cash payment upon closing, Devon said.

It also said that $1.6 billion would be paid in the form of a drilling carry. The entire $1.6 billion carry would be realized by the end of 2014, according to Devon's statement.

Drilling carry is an accounting arrangement used in energy joint ventures. One partner - in this case, Sinopec - finances the drilling expenses of the other during a defined period.

Devon said it would serve as the operator and be responsible for commercially marketing all production from these plays into the North American market.

Chinese reserves

China, which is estimated to have 36.1 trillion cubic meters of technically recoverable shale gas reserves, is expected to hold its second shale gas auction this month. The first auction was held in June.

In the first auction, Sinopec was one of the winning bidders, securing rights to explore the Nanchuan block, which covers a total area of 2,198 sq km in Sichuan and Guizhou provinces.

The company said that it planned to invest about 590 million yuan ($93.7 million) in the block during the survey period, which would last three years.

China said on Friday that it would categorize shale gas as a separate type of natural mineral resource, underscoring the strategic importance of the fuel resource. Previously, shale gas was included in the general oil and gas category.

The US shale gas revolution has helped remake the energy landscape in the country and reduce its dependency on energy imports.

Industry experts said that the shale gas industry remains in its infancy in China, and its near-term development wouldn't be comparable to that in the US, given China's shortfalls in technology and more complex geological structures.

Analysts have noted that China's shale gas deposits are located at about twice the depth of US deposits, making extraction more difficult and expensive.

Foreign cooperation

China National Petroleum Corp, the country's biggest energy company, has found shale gas in the North Shilou shale gas block in Sichuan province through cooperation with Royal Dutch Shell PLC.

China must cooperate with foreign companies to obtain more technology through acquisitions, analysts said.

China National Offshore Oil Corp (CNOOC), the country's biggest offshore oil producer, bought a 33.3 percent interest in the US-based Chesapeake Energy Corp's shale gas and oil project in early 2011 for $570 million.

Last month, CNOOC and Sinopec were also reported to be competing to buy a 30 percent stake in the Texas-based Frac Tech Holdings LLC, a shale gas service company, in a deal that could be valued at about $2 billion.

Neither of the two Chinese companies would confirm any deal.