Chinese oil and natural gas companies are pouring billions of dollars into US shale-drilling projects in an effort to acquire American technology about hydraulic fracturing and other cutting-edge drilling practices, according to experts interviewed by Platts.
These state-owned companies want to obtain this specialized knowledge from US oil and gas companies so China can better develop its own shale plays, these experts say.
But the Chinese companies are largely failing in their quest, the experts say, because their US partners have structured the business dealings so that China cannot appropriate America's most important drilling-related technologies.
"Chinese companies certainly intended to acquire technologies in the US through equity investment, but the problem is that these arrangements have embedded firewalls installed," said Bo Kong, an energy expert at Johns Hopkins University's School of Advanced International Studies in Washington.
Kong, who wrote a book about Beijing's efforts to acquire equity in foreign oil and gas projects, said US drillers are typically happy to take China's money. But Kong said US oil and gas companies take great care to structure these business dealings to prevent the Chinese investors from obtaining proprietary information about fracking or other key aspects of the drilling process. This includes prohibiting employees of Chinese companies from setting foot on American drilling sites and entering US corporate boardrooms, Kong said.
CHINA TO PULL BACK?
Dealogic, a financial-services firm with offices in New York, London and other major cities, estimates that Chinese companies have invested nearly $2.9 billion on acquisitions in the US oil and gas sector since the beginning of this year alone. That is a 125% jump from all of 2011, and a dramatic increase from 2009, when Chinese firms spent just $5.1 million on acquisitions in the US oil and gas sector, according to Dealogic.
But Kong expects the surge in Chinese investment to drop off in the coming years as Beijing realizes that US oil and gas companies are not going to give up their technology for developing shale plays. China may also decide pull back if US gas prices do not rise soon, reasoning that investing in US shale plays is not a good business decision, Kong said. "If this continues and it becomes clear to Chinese energy companies that they can't get the technologies, and shale gas prices don't improve in the US, I think those factors will really dampen their enthusiasm for investment in the US [oil and gas] sector," Kong said.
Benjamin Schlesinger, who heads his own energy consulting firm in Bethesda, Maryland, echoed Kong's view that Chinese oil and gas companies are investing in US shale-drilling projects in an effort to obtain technological knowledge. And like Kong, Schlesinger said US companies are inserting restrictions in their deals in an effort to prevent that from happening.
"You have to take each deal on an individual basis," Schlesinger said. "Conditions may differ from deal to deal, field to field and resource to resource."
For the most part, the Chinese firms making these deals have been unable to get access to the US drilling technology they are seeking, according to Jane Nakano, an energy and national security expert at the Center for Strategic and International Studies, a Washington think tank.
Nakano said China lags far behind the US in terms of the technology and the technical expertise needed to fully exploit oil and gas shale plays. But Nakano said it was unclear if US companies are putting restrictions in deals with Chinese companies because of their ties to a Communist government, or for some other, unrelated reason. She noted that US oil and gas companies have put similar restrictions in deals they have signed with firms headquartered in foreign countries other than China.
NO 'SHOULDER-TO-SHOULDER' CONTACT IN DEVON DEAL
But for now, at least, Chinese state-owned oil and gas companies have taken equity stakes in a number of shale-drilling projects around the US. In January, for example, China Petroleum & Chemical Corporation, which is commonly referred to as Sinopec, announced that it was investing $2.44 billion in Devon Energy, an Oklahoma-based oil and gas producer.
Under the terms of the deal, Sinopec acquired a one-third stake in five US shale plays where Devon operates: the Tuscaloosa Marine Shale in Louisiana, the Utica Shale in Ohio, the Mississippian Shale in Oklahoma, the Michigan Basin shale in Michigan, and the Niobrara Shale in Colorado, Wyoming and Nebraska.
Devon spokesman Chip Minty said Sinopec's substantial investment reduces Devon's financial risk in the five drilling projects. It also means that Devon does not have to divert its own money from other drilling projects to develop those five shale plays, Minty said.
Minty pointed out that several companies other than Sinopec had expressed interest in the partnership.
"It wasn't as if we sought foreign partners for these projects; Sinopec just happened to be the company we saw the most benefit in selecting," he said.
Still, Minty said there are a number of important restrictions in the deal that Devon inked with Sinopec. For example, while the arrangement allows Sinopec officials to track oil and gas production in the five plays, the deal explicitly prohibits them access to Devon's hydraulic fracturing technology, Minty said. Moreover, the deal bars Sinopec employees from working in the five plays, Minty said.
"In terms of working shoulder-to-shoulder with Devon employees in these drilling plays, that doesn't happen," Minty said. "That's not the purpose of the agreement, and that's not the way the partnership is being carried out."
Kong said Oklahoma-based Chesapeake Energy insisted on similar restrictions in the $1.27 billion deal it entered into last year with China National Offshore Oil Corporation.
Sinopec did not respond to requests for comment about its interest in US fracking and horizontal-drilling technologies.
