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Royal Dutch Shell Limiting Investment in Chinese Shale Gas

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By Muhammad Ali Khawar on Apr 3, 2016

Royal Dutch Shell plc. (ADR) (NYSE:RDS.A) unlike BP plc. (ADR) (NYSE:BP) is looking less enthusiastic for the exploration and production of shale gas. As reported by Bloomberg, Shell has indicated that it is not pursuing with the development of the Fushun-Yongchuan shale gas block in the China’s Sichuan province.

The news comes following BP and China National Petroleum Corporation (CNPC) latest deal for shale gas exploration in the country. Both the parties signed a production sharing contract (PSC) for shale gas exploration, development, and production in China’s Nejiang-Dazu block in the Sichuan basin.

Shell’s Initial Decision

Shale gas is a matter, which has gained immense popularity in the last few years. Energy companies have developed and discovered new drilling techniques of horizontal drilling and hydraulic fracturing. The techniques allow oil companies to drill deeper into the surface and extract more oil. The technology however is mostly practiced in North America. As mentioned above, the new innovations in drilling has reaped dividends for energy companies and has allowed them to extract more oil.

As completion increases in the US, companies began to diversify and spread their operations to other countries as well. Shell for instance in 2012 signed a PSC with CNPC for the development, exploration and production of shale gas in the Sichuan basin.

Shell back then was highly optimistic about its partnership with CNPC. China as we all now is the highest populated area in the world and is a major energy consumer. To establish a strong footing in the market would be a great bonus.

Shell’s initial plan involved a spending of $1 billion in China for shale gas reserves. Several of Shell’s representatives were enthusiastic over plans. As reported by Reuters, Lim Haw Kuang, one of Shell’s top executive when asked about Shell’s commitment in the country, replied: “If there has been an adjustment to that pledge, it could only be an upward revision.”

Current Scenario

Now, things seem quite different. In the four years, a lot has changed. Oil prices for instance were trading around over $100 per barrel. Now the prices are in turmoil. Failure to reach a consensus between the Organization of Petroleum Exporting Countries (OPEC) has further damaged the commodity.

On Friday, the US benchmark for crude oil, West Texas Intermediate (WTI) closed down 4.04% at $36.79 per barrel, while the global benchmark for crude oil Brent Crude was down 4.12% at $38.67 per barrel. With oil prices trading at such low levels, it becomes highly difficult for oil companies to operate effectively.

The Chinese topographic conditions are very complicated. The challenging geology caused the cost of production for these firms to rise significantly. Low crude oil prices along with high costs of production aren’t a combination that companies would like to have.

As reported by Bloomberg, Jessica Miao spokeswomen of Shell, in an emailed statement regarding the issue said: “We have decided that there is no follow up investment that can be justified.”

Shell-BG Merger

Another reason why BP and Shell cannot be compared when it comes to investments in China is because of the massive Shell- BG Group plc. (ADR) (OTMKTS:BRGYY) $70 billion merger. Shell through BG has been able to augment its gas portfolio. The merger has allowed it to become a leading player in liquefied natural gas (LNG). Moreover, Shell also has access to BG’s gas assets in various countries including Brazil, East Africa, and Egypt.

Shell is already gaining a strong footing in gas. Meanwhile, BP has very few projects in gas. BP through its alliance with CNPC would be able to extract gas through shale drilling techniques in the country. According to the Energy Information Administration (EIA), China holds the largest technically recoverable shale gas resources. If BP is able to tap these reserves, it will have benefits for both Shell and China.

Shell- Alaska Investment

Shell, following the crude oil price rout, had also a plan of incorporating a $7 billion Arctic drilling. The Arctic region is considered a very promising one with abundant oil and gas reserves, but the topography in Alaska is highly rugged. Moreover, the temperatures are also at an extreme.

Shell was forced to call off the plan after it found little success in the region. The higher costs of production and falling crude oil prices were major reasons for Shell’s abandonment of the project. With oil prices at such low levels, energy companies would now have to become selective when choosing projects and engage in projects that best match their skills.

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Editing by Asad Rizvi; Graphics by Danish Raza

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