China Shale Boom Seen by Honghua as Pollution Cuts Coal Use

Apr 25, 2014 2:28 am ET

(Updates share price in 12th paragraph.)

April 25 (Bloomberg) -- Honghua Group, a Chinese drilling- equipment maker that gets most of its business from overseas, is seeking to expand at home as the nation works to spark its own shale gas revolution.

The Chengdu, Sichuan-based company, which has sold rigs for use in U.S. gas fields since 2005, sees an opportunity in China as the country looks to boost production from shale formations to meet growing energy demand and move away from dirtier sources of fuel like coal, Chairman Zhang Mi said in an interview.

“It’s highly likely for China to develop shale on a large scale like the U.S.,” Zhang said in Beijing on April 23. “China needs natural gas very badly.”

China, the world’s biggest holder of natural gas reserves trapped in shale rocks, has set a national output goal of 6.5 billion cubic meters by 2015 and as much as 100 billion cubic meters by 2020. While China’s reserves are almost double that of the U.S., its target is smaller than U.S. production, which reached about 290 billion cubic meters in 2012.

China Petroleum & Chemical Corp., Asia’s largest refiner, known as Sinopec, last month marked shale gas development as its 2014 priority after doubling its output forecast from a key field in the Sichuan region in the country’s southwest.

The Fuling project will yield at least 10 billion cubic meters in 2017, Sinopec Chairman Fu Chengyu said March 24. The output will come from an area of about 200 square kilometers (77 square miles). The company’s parcel around Fuling extends for 4,000 square kilometers and has 2.1 trillion cubic meters of shale gas reserves, Fu said.

‘Tiny Portion’

“That is merely a tiny portion of the shale potential in the Sichuan basin,” where about 40,000 to 50,000 square kilometers may yield the resource, Honghua’s Zhang said.

Shale production is more expensive in China than in the U.S. because of challenges including mountainous terrain, higher population density and deeper formations, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co. said in a March 28 report.

“China’s shale revolution is still likely to be a long drawn out affair compared with the U.S.,” Beveridge said. Sinopec’s Fuling “is structurally different from the rest of Sichuan, which means that it may not be reflective of the wider Sichuan basin as a whole,” he said.

China holds 1,115 trillion cubic feet (31.2 trillion cubic meters) of technically recoverable shale gas reserves, the U.S. Energy Information Administration estimated last year. The U.S. has about 665 trillion cubic feet (18.6 trillion cubic meters), according to EIA, the Energy Department’s statistical arm.

Private Investment

Honghua, which gets about 20 percent of its sales from China, has a contract to provide drilling rigs for PetroChina Co.’s shale gas project in Sichuan, Zhang said. The company is also looking to expand its partnership with Baker Hughes Inc., Zhang said, without giving further details.

Shares of Honghua, which have dropped 24 percent this year, were at HK$1.98 at 2:23 p.m. in Hong Kong today. The company had net income of 537.6 million yuan ($86 million) on sales of 8.05 billion yuan in the year ended Dec. 31.

The company is seeking to participate in future shale gas developments in the nation by becoming a minority shareholder in projects with state energy producers, foreign companies and local governments, he said.

At the National People’s Congress in Beijing last month, both Sinopec’s Fu and Zhou Jiping, the chairman of PetroChina and China National Petroleum Corp., its parent company, said they would open shale development to private investment, as part of government-driven reforms.

“Once resources are open to markets, shale gas development in China will be thriving,” Zhang said.