Shell Is ‘Welcome Barbarian’ in China’s Shale Gas

By Stanley Reed and Dexter Roberts

The hilltop city of Yulin, about 500 miles (800 kilometers) southwest of Beijing, was once a strong point in the defensive wall that protected the Chinese heartland from the tribes to the north. An ancient fortress survives in the old part of the city, the Chinese characters for “Suppress the Barbarians” carved over its gate.

Today, Yulin’s a boomtown in the oil- and natural-gas rich Ordos Basin, Bloomberg Businessweek reports in its Nov. 21 issue. In the streets not far from the fortress walls, where men sell roasted goat heads from carts, young boys hand out brochures for apartment towers built for newly wealthy oil workers and coal miners.

If fresh characters were carved into the old fortress gates now, they might say “Resource Barbarians Welcome!” Or they might simply be a pair of corporate logos: one for PetroChina Co., the publicly traded wing of China National Petroleum Corp., the nation’s largest oil company, and a second for its foreign partner, Royal Dutch Shell Plc (RDSA), the largest European oil company.

A half-hour drive from the city is a new, white building that stands out in the desert scrub land. Clean and bright, it has offices, conference rooms, and a big second-floor terrace overlooking acres of neatly arranged tanks and piping.

This is the Changbei gas field. An estimated $1.3 billion joint venture, the field is managed by The Hague-based Shell for PetroChina and produces more than 3 billion cubic meters of gas a year.

Over a lunch of stir-fried chicken and snow peas, tangy local peaches and green tea in the building’s high-ceilinged commissary, the plant’s two bosses, General Manager Xu Li, a Shell man, and PetroChina veteran Xu Yanming, his deputy, banter about Changbei.

Shell Cost Controls

Xu Yanming, dressed more like a local merchant than an oil man — in slacks and a dark windbreaker — ribs Shell’s Xu, who has a degree from Oxford University and wears the standard blue, one-piece Changbei boiler suit.

“Shell has had four managers — and the whole time it has just been me,” Xu Yanming says. An earlier Shell manager, whom he dubbed a yangren — slang for Westerner — assumed ridiculously high costs, including $20 per diem for Chinese staff. Shell had also factored in exorbitant costs for water.

“Some at Changbei think PetroChina had stronger cost controls than Shell,” Xu Yanming chuckles.

Changbei is the most visible playing field for a tricky high-stakes game Shell has entered into with the Chinese behemoth, an engagement that mirrors the larger global shift of power from the major oil companies to the state-owned crude producers.

Unlocking Resources

PetroChina wants Shell’s expertise to unlock the unconventional gas and oil resources, such as shale gas, that require new techniques to extract. Shell wants PetroChina’s help in gaining access to the mainland, China’s newly hot gas fields, and its energy-hungry consumers.

The U.S. Energy Information Administration said in April that Chinese shale may hold 1,275 trillion cubic feet of gas, 12 times the country’s conventional natural gas resource. The “technically recoverable” reserves are almost 50 percent greater than the 862 trillion cubic feet estimated for the U.S., the agency said.

Last year, China became the largest energy consumer in the world, surpassing the U.S., according to BP Plc’s Statistical Review of World Energy. China is expected to account for almost half the world’s growth in oil consumption in the next two decades, becoming the largest market for oil, and it’s trying to more than double the use of gas in its economy, to 8 percent of the energy mix, by 2015.

Flow to China

Shell isn’t just angling for the gas in China. As China and Asia surge in importance, the company wants to use its Chinese partnerships to help gain influence over the flow of all global resources destined for China, from the Middle East to Australia.

Shell executives think they’ve picked a winner in PetroChina and the company is going all out to please Beijing. In June, company directors visited Changbei and the Iron Man Wang Jinxi Memorial Hall, a shrine to an iconic 1960s oil worker, at PetroChina’s largest field, Daqing.

“This is the most advanced Chinese alliance; this is about the future,” says Jerry Kepes, a partner at the Washington energy consultant PFC Energy. “Shell gets it. But Shell has to deliver.”

The relationship carries plenty of risk. For Shell, the risk is that once PetroChina has absorbed its know-how, it will become a competitor that not only will take Shell’s share of the business but also will one day attempt to swallow the Anglo- Dutch giant whole.

Courting CNPC

The Chinese have long known there was gas in Changbei, without having the skills or technology to extract it. So they went looking for a partner that did. Even though the pair seemed to be made for each other — both are gigantic, bureaucratic, and eager to be top players — CNPC, as PetroChina’s parent company is known, and Shell courted for more than a decade before getting serious in the late 1990s.

The two companies signed a production-sharing agreement in 1999. Shell’s bosses dithered on giving the final go-ahead for investment when China raised gas prices and the market outlook improved.

At about the same time, the company spurned an invitation to participate in the $12 billion West-East Gas Pipeline that China wanted to build to bring gas to its major cities. Shell’s management did not think the terms were adequate.

Sharing Priorities

“It became clear that we did not share the same priorities and expectations,” said Shell Chief Financial Officer Simon Henry.

Shell’s top managers didn’t give the green light on Changbei until 2005, after lower-level executives warned it was on the verge of losing the deal and another great opportunity.

Since then, Shell’s expertise, coupled with PetroChina labor, has made Changbei work.

The field’s gas is “tight,” meaning it’s trapped in rocks that don’t easily give up their treasure. Shell solved the problem with horizontal wells that level off when they reach the gas, which is in layers about 10,000 feet (3,000 meters) below the surface.

A two-pronged pipeline is then drilled out from the bottom of the well horizontally for about 6,000 feet so that the well can suck gas from a huge expanse of rock. So much gas flows into these pipes that Changbei’s fields are highly prolific.

Slashing Well Costs

Before teaming up with Shell, PetroChina used to take more than 250 days to drill a well like this. Now it takes about 130 days, slashing costs on the 25 wells that have been drilled so far to $10 million from about $17 million each.

Xu Li said development costs at the equivalent of less than $1 a barrel of oil make Changbei highly profitable. Shell won’t disclose the project’s profit margin.

While noteworthy, Changbei is the first step of a much larger plan. Shell, which has about $4 billion invested in China wants to be that nation’s energy concierge, catering to the oil and gas industry’s needs. CNPC is the only avenue available to fulfill such ambitions.

The breakthrough in Shell’s China strategy occurred in August 2009 at a meeting held in The Hague. Peter Voser had recently become Shell’s chief executive officer and had cut short his vacation to meet with a delegation led by CNPC Chairman Jiang Jiemin.

Diplomatic Summits

The chemistry was good between Jiang and Voser, a Swiss national who has instilled more financial discipline at the conglomerate. Since then, meetings have occurred every few months, either in the Hague or at CNPC’s 25-story headquarters in Beijing’s Dongcheng district.

These meetings resemble high-level diplomatic summits more than business negotiations — not surprising, perhaps, given the size of the respective companies. The chairman of CNPC, which has more than 1.5 million people on the payroll and revenue of $271 billion, is more like the governor of a major province than a CEO of a company.

Each session follows the same format. The CEOs sit at the top end of a horseshoe-shaped table and converse through an interpreter hidden by a huge arrangement of flowers. Aides sit along the sides of the horseshoe.

The CEOs reach agreements in principle on ideas to pursue and signal to aides to work out the details before the next meeting three or four months later. Invariably there are lunches and dinners and drinks. The talks recently have been enlivened by the Chinese liquor Maotai. Every executive is expected to drain a toast to each person present, with no half measures tolerated.

‘Government Functionaries’

Shell executives have warmed to Jiang because he appears to be receptive to their ideas, unlike some of his counterparts at state companies. CEOs of Chinese state companies are political animals whose decisions aren’t driven strictly by profit motive.

“These are talented, tenacious people that should not be underestimated,” said Jeff Layman, a partner at law firm Baker Botts LLP in Beijing. “But at the end of the day, they are still government functionaries. They may be looking at their futures beyond the companies they are managing.”

The powwows between the two companies have produced a list of projects, some of which are already under way. If they all come to fruition, they could be investing $50 billion together, not only in China but also in Qatar, Australia, and elsewhere over the next decade or so.

Syrian Joint Venture

Shell also let CNPC into a joint venture in Syria that might have been an entrée into the Arab world. The deal has fizzled, and Shell is no longer lifting crude since the Syrian regime was hit with international sanctions following its crackdown on dissidents.

For Shell executives, this elaborate courting of the Chinese reflects a growing awareness of the energy market’s new realities.

Forty years ago major Western oil companies such as Shell controlled more than 60 percent of the world’s oil reserves. Thanks to waves of nationalizations and depletion of oil fields in the West, the producing countries now control the bulk of that oil.

With few exceptions, the only way to make an impact in such places — whether Venezuela, Russia, or Abu Dhabi — is through partnerships with the national oil companies. China is the biggest of these.

Global Player

According to Xinhua, China’s official news agency, China plans to invest $828 billion in its power industry by 2015, developing oil and gas fields, building refineries and pipelines across the country and adding power plants, wind farms and nuclear reactors. Green energy production is a priority because China also wants to cut carbon emissions and reduce the energy intensity of its economy by 2015.

PetroChina’s plans are ambitious, too, and its objective is clear: It wants to be on the level of Shell someday and is pushing its partner to help it become a global player.

For instance, Shell sponsors a leadership development program for senior Chinese executives run by Peter Nolan, a professor at the Judge Business School at the University of Cambridge.

The company supplies materials and speakers for the program to build relationships with the Chinese executives and prepare them to work on joint ventures. PetroChina executives have even visited the Hague to learn how Shell complies with U.S. Securities and Exchange Commission regulations.

Riding the Tiger

The big question is: Can Shell keep riding this tiger? What prevents PetroChina’s parent, CNPC, from exploiting the Western producer for what it wants and then tossing it aside or perhaps even taking it over?

For now, CNPC appears content to see what it can gain through the partnership. Shell CFO Henry, who manages the PetroChina relationship, said in an interview that there is a quid pro quo for being permitted to work in China: helping the Chinese company acquire oil and gas resources outside of China.

Qatar, the emirate that is the world’s leading gas exporter, is a place where Shell is playing the energy concierge with considerable skill. In 2008, the company sold more than one-third of the output of its Qatargas 4 plant in Qatar to PetroChina in long-term contracts.

That deal impressed Shell’s majority partner in the project, Qatar Petroleum, and has led to two others: Shell, Qatar Petroleum and PetroChina are planning a refinery and petrochemical complex in China’s southeastern Zhejiang province.

Tripartite Relationship

Shell has also brought in PetroChina as a 25 percent partner to explore for more gas in Qatar. If that arrangement yields a big find, it could lead to a new $10 billion to $15 billion liquefied natural gas plant.

“This tripartite relationship is important to us,” said Andy Brown, Shell’s Qatar chief. “We can play a role between a major energy-producing country and a major energy-consuming one.”

Shell is delivering not only in Qatar but also on Curtis Island, a 30-by-15-mile strip of land within Australia’s Great Barrier Reef World Heritage area.

In 2010, it joined forces with PetroChina to buy Arrow Energy for A$3.6 billion ($3.6 billion). Arrow has plans to build a $20 billion liquefied natural gas plant to feed the fuel to China. Henry says being able to buy an energy company in a developed country such as Australia earned Shell “huge Brownie points.”

Still, the long-term risk remains that PetroChina will learn to develop even difficult oil and gas fields with the aid of technology-rich service companies such as Schlumberger Ltd. and Halliburton Co., then kiss Shell goodbye.

That’s the thing about the energy game in China: Sooner or later, someone has to lose.

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New realignments in Asia

Eric S. Margolis
20 November 2011, 7:29 PM

I’ve a lovely little painting in my study of Germany’s first emperor, Kaiser Wilhelm I.

It was painted soon after the 1870-71 Franco-Prussian War and the creation of a united Germany with Wilhelm as its monarch – thanks to the great German statesman, Prince Bismarck.

United Germany’s fast-rising economic and military power was seen by the British Empire, which then ruled a quarter of the globe, as a dire threat.

Bismarck managed to cleverly divide or distract Germany’s foes. But the new young Kaiser Wilhelm II dismissed the domineering Bismarck and soon plunged his nation into confrontation with Imperial Britain over naval power, colonies, and trade. Britain determined to crush rival Germany. The fuse of World War I was lit. We see the first steps of a similar great power clash taking shape today in South Asia.

A usually cautious China has been aggressively asserting maritime claims in the resource-rich South China Sea, a region bordered by Indonesia, Vietnam, Brunei, the Philippines, Malaysia, Taiwan and China.

Japan, India, South Korea and the United States also assert strategic interests in the hotly disputed sea, which is believed to contain 100 billion barrels of oil and 700 trillion cubic feet of natural gas. China has repeatedly clashed with Vietnam and the Philippines over islets and rocks in the South China Sea. Tensions are high.

In 2010, the US strongly backed the maritime resource claims by the smaller Asian states, warning off China and reasserting the US Navy’s right to patrol anywhere.

The US is increasingly worried by China’s military modernisation and growing naval capabilities. Washington has forged a new, unofficial military alliance with India, and aided Delhi’s nuclear weapons development, a pact clearly aimed at China.

US forces are now training Mongolia. China may deploy a new Fourth Fleet in the South China Sea. Washington expresses concern over China’s new aircraft carrier, anti-ship missiles and submarines. The US may sell arms to Vietnam. The US is modernising Taiwan’s and Japan’s armed forces.

These moves sharpen China’s growing fears of being encircled by a network of America’s regional allies.

They also disturbingly recall the naval race between Britain and Germany during the dreadnaught era that played a key role in triggering World War I.

As a historian, I’m most concerned. Youth in China and India are seething with mindless nationalism caused by too much testosterone and propaganda. A decade ago, I wrote a book that dealt with a future war between China and India over the Himalayas and Burma.

The US, the inheritor of Britain’s Empire, is struggling to finance its vast sphere of influence. The Republican Party is in the grip of extreme elements and primitive nationalism. The Pacific Ocean has been an American Lake since 1944. Washington’s ’s biggest foreign policy challenge is keep peace with China while gradually lessening its domination of the Asian Pacific coast, allowing China to assert its inevitable sphere of influence in the region

The bankrupt US cannot hope to compete long-term with cash-rich China to be top dog in south Asia. But history shows that managing the arrival of a new super-power is dangerous, tricky business.

Clever diplomacy, not more Marines, is the answer. The over-extended American Raj has got to face strategic reality or it risks going the way of the Soviet Empire.

But Washington’s global domination crowd won’t face facts. The US, which accounts for 50 per cent of world military spending, is now sending troops to East Africa, Congo, West Africa, and now, Australia.

US foreign policy has become militarised; the State Department has been shunted aside. The Pentagon sees Al Qaeda is everywhere.

The US needs the brilliant diplomacy of a Bismarck, not more unaffordable bases or military hardware.

A clash in the Pacific between China and the US is not inevitable. But events last week brought one closer.

Eric Margolis is a veteran US journalist

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Congress approves shale-gas tankers for Sunoco operation

The U.S. Congress approved delayed legislation on Friday that will allow Sunoco Inc. to transport ethane, a form of liquefied natural gas (LNG), from the Philadelphia area to the Gulf Coast.

By unanimous consent, the House on Friday approved a bill that permits three LNG tankers to participate in “coastwise” trade – carrying cargo between U.S. ports. The Senate approved the legislation on Thursday.

The Mariner Project, a joint venture between Sunoco Logistics Partners L.P. and MarkWest Energy Partners L.P., would transport ethane produced from the Marcellus Shale by pipeline to Marcus Hook and then by sea to the Gulf Coast, where ethane is used to make plastics.

Because there are no qualified U.S.-flagged LNG vessels available to carry the fuel between Marcus Hook and the Gulf Coast petrochemical plants, the Mariner Project needed a waiver to the Jones Act, the 1920 law that protects markets for U.S. vessels.

U.S. Sen. Pat Toomey and U.S. Rep. Pat Meehan, whose district includes Marcus Hook, promoted the Jones Act waivers. The Republicans argued the project would generate 300 to 400 new construction jobs and 25 long-term jobs to operate the shipping terminal.

The three LNG tankers are American-built, American-owned vessels that now fly foreign flags. Reflagged as U.S. vessels, the ships must also employ U.S. crews and be maintained in America.

Toomey and Meehan had steered the three LNG tankers into special legislation that was being rushed through Congress to allow 60 foreign ships to participate in the America’s Cup sailboat race. The bill appeared to have smooth sailing ahead.

But as the legislation landed in the House this month, it became freighted with five additional vessels whose sponsors also sought Jones Act waivers. That caused delays.

The American Maritime Partnership, a lobbying group of U.S. transporters and shipbuilders, objected to the five vessels, saying they “could have an adverse competitive impact on existing operators in the coastwise trade.”

Legislators agreed this week to remove two of the vessels, allowing for the bill’s passage.

The maritime association, in a letter to lawmakers, said it did not object to the three LNG tankers because they “present a unique situation insofar as there are no coastwise-qualified U.S.-flag vessels that would compete against those ships.”

But Sunoco’s project is not a sure bet. Energy analysts say the sea route will have a hard time competing with proposals to move ethane cross-country by pipeline, the cheapest mode of transport.

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UK: Key Oil Majors, Plexus Team Up to Develop New Subsea Wellhead

Plexus Holdings PLC, an oil and gas engineering services business and owner of the proprietary POS-GRIP® method of wellhead engineering, announces world leading oil and gas companies Maersk Oil , Shell, Wintershall,  and the UK entity of the world’s largest offshore drilling company, and oil and gas technology solution consultancy SafeKick Ltd have signed up as consulting partners to Plexus’ Joint Industry Project (‘JIP’) to develop and commercialise a new and safer subsea wellhead utilising Plexus’ patented POS-GRIP technology.

In addition Plexus is in advanced discussions with three further international oil and gas operators regarding joining the JIP project, and expects to provide an update on this in due course.

Overview

· JIP initiated in October 2010 in response to oil and gas industry encouragement for Plexus to develop the application of its POS-GRIP surface and platform friction-grip wellhead technology subsea

· New ‘HGSS’™ subsea wellhead will be designed to address key technical issues and requirements highlighted following the Gulf of Mexico incident in April 2010

· Key industry members of the JIP will contribute to the design and engineering process for the new subsea wellhead – Plexus’ intention is for relevant JIP partners to become end users of HGSS wellhead once fully built, tested and commercialized

· 18-24 month development programme – total project cost over a two year period estimated at £1.5m to £2m of which a substantial part will classify as R&D

· Recruiting a subsea development and engineering team for the JIP, located in a dedicated building in Aberdeen

· Intellectual property (‘IP’) generated by the project will be owned by Plexus, adding to the extensive suite of IP associated with proprietary POS-GRIP technology

Plexus’ CEO Ben Van Bilderbeek said, “Today’s announcement is a major vote of confidence for our JIP subsea wellhead project, and confirms the strong support and encouragement we continue to receive from key industry players to further develop our friction grip wellhead technology in areas beyond our organic jack-up exploration activities. I believe that there is a growing recognition by the industry of POS-GRIP technology, which reinforces the significant commercial potential in new application areas such as subsea.

“I am confident that the HGSS Subsea Wellhead will ultimately prove to be a superior subsea wellhead option in the years to come, and we look forward to working closely with all our new partners, as well as welcoming additional JIP members to the project in due course, as we continue to develop the POS-GRIP HGSS Subsea Wellhead project”.

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Dolphin Drilling to Provide Two Drillships for Anadarko’s Mozambique Operations

Dolphin Drilling Ltd., said on Friday it has entered into contracts with Anadarko Petroleum for the provision of the drillship Belford Dolphin and its newbuild drillship under construction by Hyundai Heavy Industries (HHI).

The contracts are each for four years and are expected to be in support of Anadarko’s future long term drilling programmes offshore Mozambique.

The Belford Dolphin contract will commence January 1st 2012 in direct continuation of its existing contract with Anadarko which had previously been scheduled to continue to April 2013. The value for the Belford Dolphin contract is approximately $701 million.

The four year term of the newbuild drillship contact cewill begin on commencement of operations offshore Mozambique expected in the fourth quarter 2013 following delivery by HHI and mobilization to Mozambique. The newbuild drillship contract value is approximately $727 million including a mobilization fee of $15 million. In connection with the newbuild contract it will be invested in a second BOP, estimated to USD 35 million.

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