Companies other than traditional oil and gas production and exploration firms may have won a large portion of the 20 blocks that were offered up in China’s second round of shale gas auctions. Although the results of the auction have yet to be officially declared, industry officials mentioned that real estate firms, investment companies and coal companies put in more aggressive bids compared to large oil and gas companies, potentially allowing them to participate in China’s fledgling shale gas industry.  Taking into account the technical challenges involved in shale gas exploration, these firms will need to seek the services of oil field services contractors like Halliburton (HAL).
Chinese Shale Gas Reserves Largely Untapped
While shale gas has helped to redefine the energy landscape in countries like the United States where it now accounts for almost 20% of natural gas production, it has been off to a slow start in China despite the fact that it holds the world’s largest shale gas reserves. China began exploring for shale gas in 2009. The Chinese government is targeting 6.5 billion cubic meters of gas production by 2015 and about 100 billion cubic meters by 2020, however the progress has been relatively slow given that it has yet to begin commercial production. 
How Will Halliburton Benefit?
There are several factors that have impeded shale gas exploration in China like a lack of geological data, poor supporting infrastructure, a dearth of technical know how and the country’s relatively scarce water resources, which is required for hydraulic fracturing.
Unlike most oil and natural gas reservoirs that typically require drilling vertical wells, accessing shale gas deposits requires a complex technique of horizontal drilling. In conjunction with this, hydraulic fracturing is required to create cracks in the shale rocks and stimulate the flow of the gasses. While state-owned oil companies including the China National Petroleum Corporation have been investing in shale gas projects in the United States to gain expertise in shale technologies, private players and non-oil firms will be better off engaging contractors like Halliburton to carry out drilling and to provide technology. 
Halliburton, one of the leading players in America’s shale gas boom, has a strong suite of services aimed at the shale gas industry, which include technologies to reduce water consumption for fracking and 3-D mapping technologies to gather geological data, which would be valuable in the Chinese market. If the firm is successful in winning shale gas drilling contracts in the Chinese market, it will increase its revenue per rig as well as EBITDA margins given that unconventional plays require a higher level of service intensity and command better rates.
We have a price estimate of $41 for Halliburton, which is about 26% ahead of its current market price.
- Non-oil Firms Bid Aggressively in China’s Shale Auction, Reuters
- Chevron Not Expecting Fast Shale-Gas Growth in China, WSJ
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Disclosure: No positions