Chinese oil and natural gas companies are pouring billions of dollars
into US shale-drilling projects in an effort to acquire American technology
about hydraulic fracturing and other cutting-edge drilling practices,
according to experts interviewed by Platts.
These state-owned companies want to obtain this specialized knowledge
from US oil and gas companies so China can better develop its own shale plays,
these experts say.
But the Chinese companies are largely failing in their quest, the
experts say, because their US partners have structured the business dealings
so that China cannot appropriate America's most important drilling-related
"Chinese companies certainly intended to acquire technologies in the US
through equity investment, but the problem is that these arrangements have
embedded firewalls installed," said Bo Kong, an energy expert at Johns
Hopkins University's School of Advanced International Studies in Washington.
Kong, who wrote a book about Beijing's efforts to acquire equity in
foreign oil and gas projects, said US drillers are typically happy to take
China's money. But Kong said US oil and gas companies take great care to
structure these business dealings to prevent the Chinese investors from
obtaining proprietary information about fracking or other key aspects of the
drilling process. This includes prohibiting employees of Chinese companies
from setting foot on American drilling sites and entering US corporate
boardrooms, Kong said.
CHINA TO PULL BACK?
Dealogic, a financial-services firm with offices in New York, London and
other major cities, estimates that Chinese companies have invested nearly
$2.9 billion on acquisitions in the US oil and gas sector since the beginning
of this year alone. That is a 125% jump from all of 2011, and a dramatic
increase from 2009, when Chinese firms spent just $5.1 million on
acquisitions in the US oil and gas sector, according to Dealogic.
But Kong expects the surge in Chinese investment to drop off in the
coming years as Beijing realizes that US oil and gas companies are not going
to give up their technology for developing shale plays. China may also decide
pull back if US gas prices do not rise soon, reasoning that investing in US
shale plays is not a good business decision, Kong said.
"If this continues and it becomes clear to Chinese energy companies that
they can't get the technologies, and shale gas prices don't improve in the
US, I think those factors will really dampen their enthusiasm for investment
in the US [oil and gas] sector," Kong said.
Benjamin Schlesinger, who heads his own energy consulting firm in
Bethesda, Maryland, echoed Kong's view that Chinese oil and gas companies are
investing in US shale-drilling projects in an effort to obtain technological
knowledge. And like Kong, Schlesinger said US companies are inserting
restrictions in their deals in an effort to prevent that from happening.
"You have to take each deal on an individual basis," Schlesinger said.
"Conditions may differ from deal to deal, field to field and resource to
For the most part, the Chinese firms making these deals have been unable
to get access to the US drilling technology they are seeking, according to
Jane Nakano, an energy and national security expert at the Center for
Strategic and International Studies, a Washington think tank.
Nakano said China lags far behind the US in terms of the technology and
the technical expertise needed to fully exploit oil and gas shale plays. But
Nakano said it was unclear if US companies are putting restrictions in deals
with Chinese companies because of their ties to a Communist government, or
for some other, unrelated reason. She noted that US oil and gas companies
have put similar restrictions in deals they have signed with firms
headquartered in foreign countries other than China.
NO 'SHOULDER-TO-SHOULDER' CONTACT IN DEVON DEAL
But for now, at least, Chinese state-owned oil and gas companies have
taken equity stakes in a number of shale-drilling projects around the US. In
January, for example, China Petroleum & Chemical Corporation, which is
commonly referred to as Sinopec, announced that it was investing $2.44
billion in Devon Energy, an Oklahoma-based oil and gas producer.
Under the terms of the deal, Sinopec acquired a one-third stake in five
US shale plays where Devon operates: the Tuscaloosa Marine Shale in
Louisiana, the Utica Shale in Ohio, the Mississippian Shale in Oklahoma, the
Michigan Basin shale in Michigan, and the Niobrara Shale in Colorado, Wyoming
Devon spokesman Chip Minty said Sinopec's substantial investment
reduces Devon's financial risk in the five drilling projects. It also means
that Devon does not have to divert its own money from other drilling projects
to develop those five shale plays, Minty said.
Minty pointed out that several companies other than Sinopec had
expressed interest in the partnership.
"It wasn't as if we sought foreign partners for these projects; Sinopec
just happened to be the company we saw the most benefit in selecting," he
Still, Minty said there are a number of important restrictions in the
deal that Devon inked with Sinopec. For example, while the arrangement allows
Sinopec officials to track oil and gas production in the five plays, the deal
explicitly prohibits them access to Devon's hydraulic fracturing technology,
Minty said. Moreover, the deal bars Sinopec employees from working in the
five plays, Minty said.
"In terms of working shoulder-to-shoulder with Devon employees in these
drilling plays, that doesn't happen," Minty said. "That's not the purpose of
the agreement, and that's not the way the partnership is being carried out."
Kong said Oklahoma-based Chesapeake Energy insisted on similar
restrictions in the $1.27 billion deal it entered into last year with China
National Offshore Oil Corporation.
Sinopec did not respond to requests for comment about its interest in US
fracking and horizontal-drilling technologies.
--Brian Scheid, firstname.lastname@example.org
--Edited by Kevin Saville, email@example.com
Similar stories appear in Energy Economist.
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