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BP signs second shale gas production sharing contract with China National Petroleum Corporation

International oil major BP (ticker: BP) said Thursday that the company has signed its second shale gas production sharing contract with China National Petroleum Corp (CNPC). The contract with the state-owned company covers an area of about 1,000 square kilometers at Rong Chang Bei in the Sichuan Basin with CNPC as the operator, BP said in its press release.

“As the world’s largest developing country, China plays a vital role in the transformation of the global energy mix and aims to increase the proportion of gas in its overall primary energy consumption,” said BP. “As a new strategic focus for China, the exploration, development and production of shale gas is expected to significantly benefit the country’s energy mix in the long term.”

The two companies agreed to a framework on strategic cooperation during Chinese President Xi Jinping’s visit to Britain in October, the company said in its press release. This is the second shale gas production sharing contract signed by the two companies this year. BP and CNPC signed their first shale gas production sharing contract on the adjoining Neijiang-Dazu block in March.

BP’s business activities in China include exploration and development, petrochemicals manufacturing and marketing, aviation fuel supply, oil products retailing, lubricants, oil and gas supply and trading, LNG terminal and trunk line and the chemicals technology licensing.

China’s push toward natural gas, while it waits for $60-$80 oil

China’s biggest oil company, PetroChina Co., wants natural gas to account for half its output by the end of the decade, Bloomberg reported last week.

PetroChina aims to raise natural gas as a share of its production from 37 percent currently, the company’s President Wang Dongjin told reporters last week in Hong Kong.  “We will have some adjustment on oil and gas production down the road,” Wang said. “There is a huge potential for natural gas production to grow in the years to come.”

PetroChina President Wang said the company had cut its domestic crude output target for 2016 to 103 million tons from 106 million tons set at the beginning of the year as some high-cost fields were shut down because they couldn’t make a profit at current oil prices, according to Bloomberg.

“Reallocating resources to refining may be a strategy to deal with low crude prices, Wang said. The shift will be temporary as oil and gas output will lead the company’s rebound once oil recovers to $60 to $80 a barrel, he said. The company expects prices to stabilize between $45 to $50 a barrel in the second half of this year, before rising to around $50 to $60 by 2017, and $60 to $80 by 2020,” Bloomberg reported.

China is scrambling to find its way in the global energy sector

According to a recent brief from the Pacific Energy Summit entitled China’s Oil Industry Enters a New Era, “China is not an oil-rich country—despite its huge oil industry—and it is impossible to change this resource endowment with endless human and material input. Although increased investment could still boost production, it is not a reasonable option in today’s market economy. The market requires profit to sustain growth, and opening the upstream market will not bring fundamental changes to the Chinese oil industry.

“For many years, the Chinese government regulated the price of each kind of energy product. There were no market prices that allowed for the substitution of an energy product when others were not available. As a consequence, Chinese natural gas was priced four times as high as coal. Today, we are seeing that all kinds of energy products are in a market and can be properly substituted with one another. Hence, in the next stage of reform, China must integrate the market pricing system into the core of the energy system in order to improve quality, structure, and operational efficiency.

“Overcapacity is the first major challenge for the future of China’s oil industry. …  It is worth noting that in China oil overcapacity is not a problem caused by a rich resource endowment. Domestic oil production supplies only around 43% of the Chinese market, which is an insufficient supply due to the lack of oil under Chinese soil. In addition to scarce indigenous reserves, China’s oil industry suffers from low efficiency. To maintain high production capacity, Chinese companies need to drill hundreds more wells than the top foreign competitors,” the report said.

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