Why Is PetroChina Scrambling For Shale?

Sep. 4.14 | About: PetroChina Company (PTR)


To gain hegemony over shale, PetroChina would have to go through its main rival: Sinopec.

China is looking to cash in on the world’s largest shale gas reserves giving PetroChina the incentive to augment its own profits.

The company is planning on drilling 154 new shell wells in Sichuan in the next couple of years.

China's leading oil and gas company PetroChina (NYSE:PTR) hasn't been doing particularly bad of late. It posted a 15% profit hike in Q2, taking net profits to 33.9 billion yuan ($5.5 billion), which was an increase of almost 4.5 billion yuan as compared to Q2 of 2013. The overall increase in profits during the first half of the year was over 4%, taking the company's 1H profits to 68.1 billion yuan (US$11.1 billion). Most of these lucrative numbers are owing to impressive upstream earnings, amelioration in refining margins and Beijing's fuel price reforms.

Yet there's a realm that the Chinese oil king hasn't conquered, one that it desperately wants to control: shale gas. And to gain hegemony over shale, PetroChina would have to go through its main rival: Sinopec (NYSE:SHI).

Sinopec's Shale lead

"We are about a year and a half behind Sinopec in shale gas exploration," said Wang Dongjin, the president of PetroChina, last week. And the primary reason behind this lag is twofold. First the, PetroChina's concentration of resources on the Longwangmiao project in Sichuan; and secondly, the fact that the company has only started shale gas exploration this year and is hence leading the chasing pack behind Sinopec. The fact that the company took longer than Sinopec to respond to government measures that are targeting more competitive markets, also gave Sinopec the head start in shale gas exploration.

Sinopec has been hogging the limelight of late, and is planning on raising around $16 billion through sales of the company's fuel retailing unit, which have whetted the investor appetite of 37 buyers. Meanwhile PetroChina took more than its fair share of time in recovering from the state's anti-corruption campaign. However now is the time for China's top oil company to surge forward.

China's shale expectations

One of the reasons Sinopec has had a head start in shale exploration is that it has been developing equipment, and training personnel to develop shale gas in China, most of which is present in difficult-to-explore formations. This is precisely why US firms like Halliburton have been alerted to the opportunities in China, since their technological expertise would be needed in Xinjiang and Sichuan, where the opulent shale basin lies in a deeply faulted region.

The impact of shale gas can be measured by the fact that not too long ago, the U.S. was supposed to become the world's largest natural gas importer. The county is now one of the largest fossil fuel exporters following enhancement in shale gas production. China is following suit, with the government looking to cash in on the world's largest shale gas reserves of 30 trillion cubic meters. This has given PetroChina the incentive to up the ante on shale gas exploration and capitalize on the massive reserves in China, and in turn augment its own profits.

Plan of Action

PetroChina can overtake Sinopec's production by 2015, if its plans materialize. The company is planning on drilling 154 new shell wells in Sichuan in the next couple of years. These alone would be responsible for around 2.6 billion cubic meters worth of gas. Sinopec's target for the next couple of years envisages total production worth 5 billion cubic meters in the year 2015.

The drilling cost for PetroChina is 55 million yuans per shale well, which would be reduced by 5 million yuan soon. This is in synchrony with the company's plans to reduce company's overall cost in Hong Kong to around 60 million yuan from the current 80 million. The company is also working in tandem with China National Petroleum Corp to welcome private investment in synchrony with the market forces. The plan to sell oil and gas field stakes to local investors in Xinjiang would also boost the company's revenue.

Furthermore the proposed purchase of PetroChina Kunlun Gas Co. suggested by CNPC would also merge PetroChina's gas supply operations and help the company's battle with private competition. While the Kunlun plan hasn't been given the green signal by PetroChina, the company's planned maneuvers on the shale front suggest that it is all set to overtake Sinopec as the top producer in China.

PetroChina's Outlook

While PetroChina's H1 - and Q2 - report is pretty decent, the H2 report should be even better. There's the natural gas price increase of 18%, asset sales gain and the expected 50 million metric tons - a million barrels per day - of oil expected from Iraq that would drive the production, revenue and profit upwards. By increasing its focus on shale gas exploration the company is vying to add long-term benefits to the short-term ones for its investors. With the surge in profits expected for the second half of the ongoing year and the company expected to overtake Sinopec in terms of shale gas production by 2015, PetroChina is a lucrative buy for both the short and long investors. Shale gas exploration has made PetroChina a lucrative long-term investment.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.