China strikes deal for Texas shale

BEIJING, Oct. 12 (UPI) -- China's largest offshore oil company, state-run CNOOC Ltd., has agreed to pay $1.08 billion for a 33 percent stake in Chesapeake Energy Corp.'s south Texas shale oil and gas field, CNOOC announced.

As part of the deal, CNOOC will invest an additional $1.08 billion to fund 75 percent of Chesapeake's shale drilling and construction costs.

The Chesapeake-CNOOC deal represents the largest purchase of an interest in U.S. energy assets by a Chinese company. Five years ago China's bid to buy California's Unocal Corp. for $18.4 billion failed, following intense U.S. political opposition over energy security concerns.

Chesapeake expects the Eagle Ford shale project to reach its peak production of 400,000 barrels to 500,000 barrels of oil equivalent a day in the next decade, the company said in a statement.

The deal isn't necessarily about securing oil and natural gas for China's own use, The New York Times said. Instead, the motivation appears to be the transfer of lucrative shale drilling technology that China needs to exploit its own shale reserves, estimated at 918 trillion cubic feet, according to data from the International Energy Agency.

"As one of the world's largest independent oil and gas companies, CNOOC is keeping a close watch on the development of the upstream sector across the world, among which is shale oil and natural gas development," said CNOOC Chairman Fu Chengyu in a statement.

China, which has surpassed the United States as the world's biggest energy user, relies on coal for about 70 percent of its energy supply. In 2009, natural gas accounted for 3 percent of the country's energy mix, states BP's Statistical Review of Energy. China aims to double that over the next five years.

The Chesapeake-CNOOC deal is the first since the Obama administration launched the U.S.-China Shale Gas Resource Initiative last November aimed at accelerating the development of unconventional natural gas resources in China using American technology and knowledge.

"From the Chinese perspective, this is a golden opportunity for them. They have identified shale resources in China but they don't have the knowledge or technical expertise to go after those resources," Ken Medlock, a fellow at Rice University's Baker Institute in Texas and adjunct professor in Rice's department of economics told the Houston Chronicle.

By boosting unconventional gas use, China could reduce pressure on strained oil supplies, limit the effect of rising oil production costs and cut carbon emissions, said Hu Wenrui, head of the China Petroleum Enterprise Association, China Daily reports.