Ever since CNOOC, one of China’s “big three” national oil companies, made an ill-fated bid to take over Unocal Corporation in 2005, Sino-U.S. energy relations have been marred with mistrust.
Foreign acquisitions by China’s national oil companies thereafter have largely avoided the United States. Many were thus caught off guard by recent reports that Sinopec has emerged as a leading suitor for some of the $7 billion in natural gas assets that Chesapeake Energy must shed to avoid a breach of its debt covenants. Yet upon closer inspection, the move is deft and bears the imprint of lessons well-learned. Chinese national oil companies know from prior experience that in the United States they must wear kid gloves to avoid getting burned.
With U.S. natural gas prices projected to remain at $2-4/Mmbtu and far higher returns on investment elsewhere around the globe, why would Sinopec pour capital into American shale gas production when so many U.S. companies are shutting down rigs? There are a number of macro- and micro-dynamics at play here.
China’s demand for gas is expected to grow rapidly in the coming years. Natural gas currently accounts for only 4 percent of the country’s energy mix, but the International Energy Agency projects this rising to 13 percent by 2035. The same organization predicts that China will account for roughly a quarter of global gas demand growth over the same period. There is also a high level of uncertainty over how reliant the country will be on foreign gas. Much of this will depend on China’s ability to exploit its vast domestic shale gas resources. If unconventional development is well-orchestrated, Chinese gas imports as a share of total demand could be as low as 20 percent in 2035. Alternatively, slow progress in unconventional gas development could lead to a dependency rate north of 50 percent, according to the IEA.
In either scenario, a stake in Chesapeake’s gas assets could potentially pay dividends for China. Chesapeake was one of the first to commit wholeheartedly to the potential of shale gas in the United States. It has snatched up vast swaths of shale acreage, and possesses the technology and know-how to efficiently extract unconventional gas from these basins. Sinopec would love nothing more than to gain firsthand experience with hydraulic fracturing and horizontal drilling techniques that could eventually be applied to China’s massive shale resources. According to the U.S. Energy Information Administration, technically recoverable shale gas reserves in China are at least 50 percent greater than the sizeable shale endowment in the United States.
Sinopec drilled its first shale gas well in Chongqing on June 9, but until it develops the capacity to unlock domestic resources en masse at low cost, acquisitions are the quickest way to bolster its gas reserves. The company might be seeking to secure a dedicated stream of U.S. natural gas production for shipping to China as liquefied natural gas in the future. This is a complicated proposition, especially considering that the scale of U.S. LNG exports is highly uncertain. The prospect of rising domestic gas prices as a consequence of satiating Chinese demand would become a thorny political issue, whether merited or not.