China has been forced into lowering its domestic shale gas forecast for 2020 to 30 billion cubic meters annually. This is a significant plunge from the previous target of 60-100 billion cubic meters. The change in forecast is because China's shale gas isn't particularly easy to extract. And China's conundrum is straight up Halliburton's (NYSE:HAL) alley.
Importance of Shale Gas
The U.S. was expected to be among the world's leading natural gas importers not too long ago, with the country recently emerging as one of the largest fossil fuel exporters owing to its shale gas production. China is eying to do the same and is planning to cash in on more than 30 trillion cubic meters worth of shale gas reserves - the largest in the world.
Even so, the biggest hurdle en route to the realization of China's shale dream is the lack of technical, technological, topological and geological expertise.
Sichuan, China's most lucrative shale basin lies in a region that is deeply faulted. This significantly limits horizontal drilling, with the prospects of earthquakes also meaning that top-drawer shale extraction experience is needed to extract gas from Sichuan.
Despite Sinopec developing equipment and personnel to develop shale gas, it's still light years behind the technical expertise that the U.S. firms can offer - most notably Halliburton.
Halliburton has already made inroads into the Chinese market through its partnership with STP Energy Group. Halliburton would own 49% of the entity that has been formed by the Halliburton-STP merger, which would be vying to explore oil in the desert of Xinjiang. The region possesses around one-thirds of China's unconventional reserves. And of course unconventional reserves' exploration is Halliburton's forte.
These reserves need high level expertise in hydraulic fracturing. Halliburton's is the leader of the pack when it comes to that, especially when one factors in water conservation. And when your work place is a desert, it would obviously be immensely critical.
Halliburton has pressure pumps that are designed to fracture amidst water shortage. The firm has also mastered the technology of water-recycling, which helps develop and sustain its assets.
Even though hydraulic fracturing has received environmental backlash and bans in the U.S., China wants to reduce its thick air pollution. Shale could produce cleaner gas as an environmentally apt replace for coal in Chinese power plants.
While Halliburton's partnership with STP itself isn't a groundbreaking deal, the fact that China is now eying to up the ante on shale gas exploration to answer its energy questions, means that the oil giant would be leading the queue when China looks towards foreign firms to provide technical expertise. China wants experience in digging out shale from difficult formations, while Halliburton, like any other firm, is looking for opportunities to enhance production and revenue. This should whet the appetite of the company's shareholders, and those who are planning on investing in Halliburton in the future.
Struggles of foreign firms
China, of course, isn't new to working in tandem with foreign oil and gas companies. Royal Dutch/Shell (NYSE:RDS.A) (NYSE:RDS.B) signed a product-sharing agreement with China National Petroleum Corp., for the Fushun-Yongchuan block, while Shell spent a billion dollars in the Sichuan basin last year. Shell would take a year working on drilling and the region's geology before finalizing the product-sharing contract and if the deal were to collapse, it wouldn't be a new experience for China.
Foreign oil giants haven't exactly had much to write home about during their Chinese expeditions. Chevron's (NYSE:CVX) struggles in the $6.4 billion worth Chuandongbei project that is supposed to conjure 12 billion cubic meters of gas annually is a prime example.
However, China is trying to reverse that trend by offering more profitability for the foreign oil firms especially in the shale gas sector. The government is including waivers on exploration equipment's import tariffs, value-added refunds, subsidies and even resource tax waivers. Most notably, China is offering complete deregulation of prices, to make it completely independent of the government's control, thus making projects in the country more profitable for foreign companies.
Halliburton is expecting Q4 profits to touch 20% in the Eastern hemisphere. Even though the current Chinese projects wouldn't factor in much in the overall $5 billion worth business in Asia and Middle East, but if the company manages to enter the shale gas arena, it could open a massive revenue enhancing opportunity for it.
Shale basins in China have gas which is trapped in formations that are more than 10,000 feet deep. There is more pressure, more temperate, more depth and more complexity when you juxtapose this with typical shale gas plays in the U.S. Halliburton's Cypher reservoir modeling software helps highlight the 'sweet spots' in the shale formation, and could help enhance production.
Halliburton has been banking on technology to increase the lure of its margins, which should increase by around 5%. The earnings are set to rise 25% touching the $4 mark, with a double digit revenue growth. All this is regardless of what happens in China. However, if banking on technology does work wonders for Halliburton, China will prove itself to be a land of opportunity - an opportunity to multiply, production and revenues, an opportunity to augments its cash flow.
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