Royal Dutch Shell Plc  .com Rotating Header Image Chevron’s New China Syndrome

By David Lee Smith August 8, 2007

Almost daily, fresh evidence emerges that the discovery and production of oil and gas is becoming a more technologically demanding global enterprise. Indeed, the key words in the previous sentence are “technologically” and “global.”

The difficulty is that, along with the need to find and tap reserves in progressively more remote parts of the world, comes the requirement that the exploration and production companies operate under the thumb of a growing number of capricious and unpredictable governments. In Russia, ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS-B, RDS-A), and BP (NYSE: BP) have all been tested by their host government, as has a group of big integrated companies that ultimately have been shunted aside by Venezuela President Hugo Chavez’s nationalization program.

It now appears that Chevron (NYSE: CVX), the second-largest U.S. oil company, will test its political and technological skills in China’s Sichuan province, where it has apparently won out over Norway’s Statoil (NYSE: STO), France’s Total (NYSE: TOT), and Shell to work with PetroChina (NYSE: PTR) in the development of the Luojiazhai sour-gas field. The field in China’s interior is characterized by a host of topographic challenges, including a highly mountainous terrain.

Luojiazhai has apparently proven gas reserves in excess of 2.0 trillion cubic feet, but those reserves contain a high sulfur content that must be processed out and can be extremely dangerous. Nearly five years ago, a huge blowout in one of the field’s wells killed 243 and injured about 2,000 area residents and workers.

The key question, it seems to me, is how relationships will progress longer term for Western energy companies operating in China. In Russia, for example, the big companies have been challenged by an increasingly difficult Putin government, to the extent that Exxon has called a halt to involving itself in new Russian projects. And while China clearly needs Western help in meeting its escalating energy demand, it’s easy to wonder whether the companies will be given the bum’s rush there once more Chinese oil and gas is flowing and those companies have become less vital to the country’s early development efforts.

What does all this mean for Foolish investors? I believe it signals yet again that the world of energy will steadily become an even more vital component of the global economy in the years to come. For that reason, I urge my Foolish friends to include a reasonable weighting of international energy companies in their portfolios. The first four companies mentioned above, it seems to me, should each be considered for a Foolish energy mix.

Fool contributor David Lee Smith doesn’t own shares in any of the companies mentioned. He welcomes your question or comments. The Motley Fool’s disclosure policy is rich as Texas tea. and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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