Growing Chinese Shale Exploration Presents An Opportunity For Schlumberger

Schlumberger (NYSE:SLB), the world’s largest oilfield services company, has yet to significantly capitalized on the international market for unconventional plays. However, we believe this is set to change as China begins to leverage its vast shale gas reserves. Shale gas, a form of natural gas that is typically trapped inside the shale rocks, has been growing in prominence. The resource has helped to alter the energy landscape in countries like the United States, where it now accounts for almost 20% of gas production.

Shale Gas In China Boosted By Government Plans

Although China’s shale gas sector is still in a nascent stage with almost no commercial production occurring last year, the government is beginning to recognize the importance that shale could play in securing the country’s energy future. The government has set an aggressive target of producing 6.5 billion cubic meters of shale gas by 2015 and 60 billion cubic meters by 2020. Last month, the Chinese government announced tenders opening up 20 shale gas blocks in southern China to foreign bidders.

The reasons for China’s interest in shale gas are manifold. Rapid industrialization and a growing population have made China the world’s largest energy consumer. The country is the world’s second largest importer of oil and continues to be a net importer of natural gas. Given that China holds the world’s largest shale gas reserves, estimated at 1,275 trillion cubic feet (the US holds around 862 tcf ), it would help boost the country’s energy security. ^[1]

Growing environmental concerns will also play a part in aiding the shale gas adoption. Coal feeds about 70% of China’s energy demands. ((China Country Analysis, EIA)) However, given the country’s goal to cut down on its carbon intensity (a measure of carbon emissions per unit of GDP), shale gas could play an important role as it is a cleaner fuel.

Schlumberger’s Opportunities And Progress

Shale gas exploration and production is technically challenging. Unlike oil and natural gas reservoirs that typically require drilling vertical wells, reaching shale gas deposits calls for a more complex technique of horizontal drilling. In conjunction with this, a procedure called hydraulic fracturing is required to stimulate the gas flow. Given that Chinese oil firms lack the requisite know-how, they will have to rely on firms like Schlumberger that have rich experience in tapping unconventional hydrocarbon resources.

Schlumberger has been investing significantly in developing efficient fracturing methods that require less pumping equipment and raw materials, and this could allow it to gain a competitive advantage in the Chinese market. Earlier this year, the company picked up a 20% stake in China’s Anton Oilfield Services Group. Anton provides operational services to shale gas developers and counts two of China’s largest energy firms – China National Petroleum Corp. and China Petrochemical Corp. – as its customers. The deal should allow Schlumberger to further its Chinese shale gas strategy and build a stronger customer base. ^[2]

Given that unconventional hydrocarbon exploration requires a greater intensity of services and commands better rates, we believe that the rising shale exploration in China will positively impact Schlumberger’s revenue per rig and EBITDA margins for the company’s Middle East and Asia rig services division.

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1. China Country Analysis, EIA [↩]
2. Anton and Schlumberger to focus on China Shale Gas Sector, Reuters [↩]