Shell's dragon dance

SHELL’S gas assets swap of its Wheatstone stake with Chevron for an increased Browse share had industry watchers puzzled about the Anglo-Dutch major’s intentions. By Gomati Jagadeesan*
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What could perhaps shed some light on Shell's grand gas strategy, and went rather unnoticed though, is its quiet courtship of the dragon with a pledge of $US 1 billion a year investment in shale gas.

There was more evidence of Shell's intent earlier this week.

Shell's China chief told media the company was committed to investing at least $US1 billion in exploiting China's shale potential over the next few years. If anything, that investment number is expected to only increase.

In a year when Shell is expected to be known more as a gas producer than an oil major, its investment into both Woodside's Browse project and its lengthy courtship of China is not surprising.

While Chevron increasing its stake in Wheatstone - a project it already is an operator of - seems a no-brainer, Shell taking a bigger piece of Woodside's beleaguered Browse project is curious.

Many argue Shell could be taking a longer-term view - one where Woodside could be persuaded to abandon its vision of locating the gas plant at the controversial James Price Point and sell the gas to a third party.

If such a scenario were to eventuate, Shell's technological prowess with its floating LNG could come in handy with Woodside and Browse partners potentially agreeing to another FLNG or even selling to Shell's Prelude, which would be up and running when Browse comes online.

Similarly, Shell's renewed commitment to invest in China's shale story is part of its effort to consolidate an early mover advantage.

It appears Shell is determined to prevent what it and other major oilies lost out on in the US.

Most, if not all, of the pioneering shale discoveries were made by independent gas producers or smaller wildcatting companies, with the majors paying hefty premiums for prime acreages.

As the US remains swept by the shale gale, the race to explore for international shale plays is one predominantly led by the majors.

With China estimated to hold at least 50% more shale reserves than the US, China's shale acreages have become hot real estate.

Shell already signed a deal last March with China National Petroleum Corporation, to drill for shale gas in the Sichuan province. It became the only company to hold a production-sharing contract for shale gas.

Early drilling results have been promising.

While it is one of the largest investors in China, Shell faces strong competition from others including Exxon, Total, BP and Chevron. All are looking for a larger share of the Chinese energy market.

Shell's deal with CNPC, the parent of PetroChina, may hold it in good stead, when it comes to exploring for shale resources.

CNPC, through PetroChina, produces about 60% of China's crude oil and about 75% of its natural gas and holds some of the best shale prospects in China.

It helps that Shell has made some strategic alliances with Chinese oilies outside of China.

Shell has a joint venture with PetroChina in Australia at Arrow Energy and with CNOOC in Canada and other east African gas projects.

The oil major also plans to relocate its global business unit for coal bed methane to China later this year and will set up a research facility for unconventional oil and gas.

With China's natural gas use poised to triple this decade and the country's oil consumption more than one-third of the world total, Shell's China strategy and the investment carrots it is dangling, are sure to pay off.

* First published in sister publication on Thursday.

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