Companies

Chinese shale holds opportunities for U.S. shale firms




When Chinese officials travel to the U.S. to prepare for the shale gas boom they expect back home, they are often told to take the Marcellus Shale as an example.

No, seriously, take it, offered Bart Hyita to a group of Chinese delegates visiting Washington County last month.

“There are many noncore assets that are available in this area,” Mr. Hyita said. The Consol Energy Inc. retiree now runs his own consulting firm and represents Consol as a client. “These properties, along with several coal properties, are available for joint venture or divestment,” he said, yielding the floor to his former Consol colleague, Daniel Su, who read aloud a list of available assets in Chinese. 

The two men were highlighting for the group of 10 diplomats — part of a trade mission that landed them at Southpointe for a morning of aerial well site surveys and an afternoon of business card swapping — one way to get the knowledge they need to tap vast shale reserves back home: Buy American.

“That‘‍s really what we’‍re trying to do, get business into the area,” Mr. Hyita said later.

Chinese companies are not strangers to U.S. shale exploration. For years, they’‍ve pumped money into U.S. firms exploring the shale gas deposits, partly in an effort to learn about the technology so it can be applied to China’‍s own extraction efforts.

In 2010, CNOOC Ltd, one of China’‍s largest state-owned oil and gas companies, bought a 33 percent stake in Chesapeake Energy’‍s interests in the Eagle Ford shale in Texas. A few months later, it acquired another minority interest in Chesapeake‘‍s assets in Colorado and Wyoming. More recently, Sinopec, another Chinese giant, signed agreements to form two new Chinese companies with two American frack service firms serving as minority partners and providing their know-how to Chinese shale exploration. 

In December, China’‍s biggest coal company, Shenhua Energy Co. Ltd., invested $90 million in a joint venture with Denver-based Energy Corp. of America to drill 25 Marcellus Shale wells in Greene County.

But as enticing as the Marcellus might be for some, China is sitting on what is believed to be the world’‍s largest shale gas reserve and it’‍s eager to bring that wealth to the surface.

“They want to buy the technology,” said John Zambelli, president of Zambelli Technology International LLC, a Downtown-based consultancy that facilitates trade between the U.S. and China. “They’‍re willing to pay a price for the intellectual property. And they want to be trained on how to do it.”

That won’‍t be the case for long, Mr. Zambelli said.

Eventually, Chinese companies will develop their own technology, he said, heavily modeled on American designs. Already, the majority of parts used in shale gas exploration in the U.S. are manufactured in China, he said. 

“If you want to sell equipment to China, you’‍re not going to make it here and ship it to China. You’‍ll make it in China for them,” he said.

The Chinese government has put a heavy emphasis on shale gas development and is doling out subsidies to ensure that about 230 billion cubic feet is produced by 2015 and up to 3.5 trillion by 2020.

Some experts have questioned whether the push can achieve those goals, partly because of the way the oil and gas industry is structured there and partly because of harsh geological conditions and water scarcities.

“Basically two-thirds of China is a desert,” said Jon Kelafant, senior vice president with Virginia-based Advanced Resources, an energy consulting firm. He also said the rock in that country’‍s shale basins is less forgiving than that in the U.S. and often buried deeper.

Unlike in the U.S. where oil, gas, and minerals are privately owned, the Chinese state has control over its subsurface goods. It doles out exclusive rights to drill underground by issuing tenders.

In 2011, the first shale gas tender secured five blocks of land for China’‍s two main state-owned oil and gas companies. The following year, the country auctioned off 20 additional blocks. Of those, 19 were sold — most to companies that have no experience developing oil and gas.

Theoretically, the goal was to replicate the U.S. model of entrepreneurial oil and gas firms competing to drill the best wells, said Damien Ma, a fellow at the Paulson Institute in Chicago who recently wrote a book about the Chinese economy.

But just because there’‍s a rush of new players into the game doesn’‍t mean the infrastructure for success is there.

The lack of an established supply chain in China — drilling crews, frack crews, water-handling equipment — means “prices and scheduling are insane,” Mr. Kelafant said.

The opportunity right now is for mid-sized U.S. oil and gas service firms to sell technology to mid-sized oil and gas companies in China, Mr. Zambelli said. The big, state-owned firms already contract with the major service companies like Halliburton and Schlumberger, and have joint development agreements with energy majors such as Chevron and BP.

Mid-level and private Chinese firms have the attitude that if a frack company is already working for Sinopec, it is somehow bound to the large player and won’‍t want to work with a smaller player. They're looking for new firms to come into the market, he reasoned. 

Mr. Zambelli said he’‍s been representing American companies to Chinese shale developers for the past two years and hasn’‍t sold anything yet, but he anticipates business will materialize over the next several years.

“Within the next two to three years, companies are going to do well in China or they’‍re not going do well at all,” he said. “Because in three years, whatever you’‍re going to offer to China, they’‍re already going to have it. Either they will have bought it or they’‍ll manufacture it.”

Mr. Zambelli worked for 20 years for U.S. Steel and has been traveling to China for the past 25 years — he spends three weeks there and three weeks in the U.S. He said doing business in China takes time and trust.

“You can’‍t go into China today and expect to do business tomorrow,” he said.

The trust issues go both ways.

“The biggest problem I have right now with U.S. companies is trust. They don't trust the Chinese,” he said. “‘‍'Why should I bring my technology to China,’‍ they say, ‘‍they're going to steal it.’‍”

Anya Litvak: 412-263-1455 or alitvak@post-gazette.com

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