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Shell bullish on China shale gas

Thu Apr 26, 2012 7:40am EDT

* Shale gas seen economic in China

* Govt policy, not geology more likely to determine pace

By Tom Bergin

LONDON, April 26 (Reuters) – Royal Dutch Shell gave a bullish outlook for the development of shale gas in China on Thursday, saying the Anglo-Dutch oil major’s drilling there suggested vast resources could be unlocked at a relatively low cost.

Chief Financial Officer Simon Henry said Shell had not yet determined the cost of producing shale gas in China but that it would probably be within the $2 to $6 per million British thermal units (Btu) seen in North America, a level that would be competitive with alternative gas sources.

“We completed 11 wells last year; we hope to effectively double that this year … We are seeing a mixed range of outcomes, everything from pretty poor reaction to excellent,” he told reporters on a call on Thursday.

The development of hydraulic fracturing, or “fracking”, as a technique for extracting natural gas from shale rock has led to a surge in gas production in the United States that has driven down energy costs and reinvigorated U.S. industry.

The U.S. Energy Information Administration has said China has even larger shale resources than the United States, but many companies have questioned whether the resources can be developed economically.

Henry, who also has executive responsibility for overseeing Shell’s China operations, said it was more difficult to extract gas from Chinese reservoirs, on average, than what Shell had seen in the United States.

But he expects production costs to come down, making Chinese shale economic at the $5 to $6 per million Btu level that Shell receives for its current, conventional gas production in China, and well below liquefied natural gas (LNG) import prices of around $16 per million Btu.

Shell is the most active of the western oil and gas groups in Chinese shale, and Henry’s view that geology or economics should not prevent China from experiencing its own “shale gale”, are among the most bullish from an industry executive so far.

Nonetheless, he said Chinese energy policy remained the wild card. Whereas the U.S. explosion in shale drilling has been driven by the private sector, he said Beijing would have to give its approval for a similar expansion in China.

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