BP Sets Up Shale Gas Operation in China

March 2016, Vol. 243, No. 3

UK-listed BP and China’s CNPC aren’t exactly strangers, already jointly developing Iraq’s Rumaila oilfield, but BP’s new shale gas deal with CNPC is the British company’s first foray into China – and it’s a major strategic move that gauges which way the winds are blowing in today’s energy sector.

Last week, BP announced it had signed a production sharing agreement with China’s CNPC for the development of shale gas resources in the Neijiang-Dazu deposit in the Sichuan Basin. The agreement is the next step in a framework agreement reached by the two companies last year.

But it’s much more than a simple agreement.

China has been eager to exploit its shale oil and gas reserves for some time now. Unlike other hopefuls across the world, it has the territory to make shale oil and gas exploration and production viable. Fracking, which is how oil and gas are commonly extracted from shale rock, quickly exhausts the wells, so new ones need to be drilled on a frequent basis. Smaller countries simply don’t have the land to afford this. China does.

Despite the current downturn in commodities, both BP and CNPC know that this won’t last forever. They also know that gas has a brighter future than crude. BP is especially aware of this; it just learned that its final bill from the 2010 Deepwater Horizon disaster to the federal and state governments for damages stands at $20 billion. The total bill, including charges already paid for cleanup and settlements, is around $50 billion.

That’s quite a bite to swallow, not to mention the damage to BP’s reputation. Just a couple of days ago, a group of high-profile environmentalists urged the British Museum to get rid of BP as sponsor because of the company’s business and strategy. According to the authors of the letter published by the Guardian, BP is not dedicated enough to remedying global climate change effects. This is hardly surprising given its line of work, but it does nothing for the company’s reputation.

For BP, the move could be beneficial both in practical terms, helping it stay on its feet in the long run, with gas getting increasingly attractive at the expense of oil, and in image terms, showing the company’s readiness to place a greater emphasis on gas in the wake of the 2010 disaster.

For China, gas is also the way forward. Beijing’s New Silk Road policy involves, among other things, reducing the country’s reliance on oil and heavy industries, which have turned it into not just an economic hothouse but into one of the dirtiest, environmentally speaking, economies.

So, BP and CNPC have a win-win situation, despite cheap gas and the distant prospects of prices improving. For both companies, the PSA in Neijiang-Dazu represents not just a source of cash but also a demonstration of their interest in cleaner energy. It might not play out well in the immediate term, but it in the long term, it’s a strategic diamond.

By Irina Slav, Oilprice.com

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