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Shell Secures First-Ever PSC for China's Shale Gas

A unit of Royal Dutch Shell plc has inked a milestone agreement with Chinese officials to use its technical know-how to develop shale gas in a first-ever production sharing contract (PSC).

The PSC is between state-owned China National Petroleum Corp. (CNPC), the country's largest producer, and Shell China Exploration and Production Co. Ltd. The companies plan to explore for shale gas in China's Sichuan Basin on the Fushun-Yongchuan Block on an area covering about 3,500 square kilometers. Specific contract details were undisclosed.

"China has huge shale gas potential, and we are committed to making a contribution in bringing that potential into reality," said Shell CEO Peter Voser.

Shell plans to use its advanced technology, operational expertise and global experience in the project to develop the shale gas resources with CNPC.

This isn't the first unconventional gas-related deal between Shell and CNPC. Last month Shell agreed to sell CNPC's PetroChina Co. Ltd., based in Hong Kong, a 20% stake in its gas prospects in northeastern British Columbia, known as Groundbirch (see Shale Daily, Feb. 3). The deal is estimated to be worth at least US$1 billion. In December PetroChina said a joint venture with Shell led to the discovery of shale gas in the Sichuan province about 13 months after it agreed to develop the area.

China recently set a target to produce 6.5 billion cubic meters (Bcm) a year of shale gas by 2015 -- from zero this year. The country has its sights set on producing between 60 Bcm-100 Bcm a year by 2020. China also wants to increase the contribution of natural gas to its energy mix to 10% by 2020 from less than 5% currently as part of a plan to reduce its dependency on coal, which now accounts for around 70% of its energy mix.

The country has an estimated 25.08 Tcm of potentially recoverable shale gas reserves, according to recent estimates released by the country's Ministry of Land and Resources. The U.S. Energy Information Administration last year said China had an estimated 1,275 Tcf, or 36 Tcm, of technically recoverable shale gas reserves, which would make it the largest holder of shale gas reserves in the world.

In addition to Shell, BP plc, Chevron Corp. and Total SA also are among some of the Big Oil companies that have partnered with China to explore for unconventional shale gas, but none have secured PSCs. Earlier this month Total CEO Christophe de Margeri said his company had a pre-agreement with China's Sinopec International Petroleum Exploration & Production Corp. to explore for shale gas, which he hoped to convert into a formal agreement.

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