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Opportunities for Hong Kong investors in Chinese gas

By John McGoldrick

Traditional energy sources – oil and gas – are one of the few areas to remain relatively untouched by the global economic crisis. All over the world, demand for gas in particular is high, as key energy consumers look for supply security as well as cheaper and more environmentally friendly alternatives to coal and oil as energy sources. Considerable investments have been made in mature markets, such as the US and Australia, but opportunities are developing in a range of countries.

Nowhere are these ‘first-mover’ opportunities more obvious than in China, as the country looks to develop its gas reserves. For Hong Kong-based investors, there are some attractive developments right on their doorstep. Understanding the Chinese market, where the opportunities lie in the long-term, and which relationships will maximise returns are important advantages when investing in gas projects.

Gas is a game-changer
As it turns out, estimated supplies and reserves of gas have never been more plentiful. Indeed, in two key markets, the boom in gas supply has literally changed the way the world sees energy security.

The North America shale gas and the Australian Coal Bed Methane (CBM) revolutions were years in the making, though they have only recently caught the attention of the global media. “Unconventional” oil and gas (by name, but now conventional in terms of the level of activity, at least in North America and Queensland, Australia) are found in shale or coal deposits and typically do not flow to surface as easily as oil and gas in the “conventional” reservoirs.

Technological advancements such as hydraulic (water) fracturing, and horizontal drilling have given these resources the ‘unconventional’ tag (as opposed to conventional vertical drilling), and have opened up huge new energy reserves.

The North American success in particular has not been lost on numerous other countries with shale and CBM deposits. Investment opportunities in these markets have, to a large degree, already been jumped on.

However, all over the world, efforts are being made to replicate the North American and Australian (Queensland) plays—China, India, Australia (apart from Queensland), Indonesia, the UK, Argentina and Poland, to name a few, all have ambitious plans. With oil sitting at about US$100 a barrel, and with developing countries energy-hungry, gas is becoming an increasingly popular, cleaner and accessible option.

Looking for investment potential
Chinese unconventional gas–estimated to be one of the largest untapped reserves in the world, and roughly split 50/50 between shale gas and coal bed methane (CBM), has huge investment potential. There is increasing demand locally for cleaner energy to help reduce the emission problems created by coal.

The government is actively supporting the development of the sector. To realise this vast potential, Chinese companies are looking to partner with experienced foreign exploration and production companies—both large and small.

It is these partnerships where some of the best investment opportunities will be seen for Hong Kong investors who are looking to get into the Chinese energy space.

The Chinese authorities have big plans for the unconventional oil and gas sector and a strong signal was recently sent to the market in the adoption of pricing subsidies—further encouraging the development of exploration and production (E&P) of shale gas deposits.

The scale of the proposed sector development – in terms of the estimated reserves, the investment dollars, and the number of operators looking to be involved – means there are significant opportunities for companies of all types in the coming years.

If the EIA’s figures come even close to being correct and there is about 1,275 trillion cubic feet (tcf) of shale gas resource—the global energy industry will be in for another shake up. Already we have seen a number of the international Majors signal that they are going to invest heavily in unconventional gas – and China will be central to these investment strategies.

We believe that Dart Energy International (DEI) is in a unique position. We were one of the first foreign unconventional E&P companies to enter the Chinese market – working in partnership with Fortune Oil and China United Coalbed Methane Corporation (a Chinese state-owned enterprise jointly owned by CNOOC and China National Coal Group Corporation) on the Liulin project. The Liulin contract was awarded in 1999, with DEI farming-in in 2009.

The Liulin project has been declared a ‘State Pilot Project’ by the Chinese Government. In October 2010, an initial 15-year Gas Sales Agreement for the Liulin block was concluded for an annual volume of approximately 1.2 Bcf. First gas sales are expected to take place in 2013.

The opportunities for Hong Kong investors
In many cases, the opportunities for Hong Kong investors lie in the partnership structures that are being set up across the Chinese unconventional sector—on both the Chinese and foreign sides.

It is the experienced, tried, and trusted foreign E&P companies that have already built a reputation in China who have the best prospects. Many of these companies are listed, or actively looking for funding to develop projects and drill more wells. Given the infancy of the sector in China, the early-mover investment opportunities are considerable.

With China's goal of producing 6.5 billion cubic meters (approximately 225 Bcf) of shale gas by 2015 and as much as 100 bcm (approximately 3.5 Tcf) by 2020 there are significant opportunities, in every sector of the gas supply chain.

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