Hess, PetroChina sign China's first shale oil deal

U.S. energy company Hess Corp (HES.N) has signed a production- sharing contract with PetroChina (0857.HK), China's first joint agreement to develop a shale oil block, the companies said on Wednesday.

China, believed to hold the world's largest technically recoverable shale gas resource, aims to replicate the production boom seen in the United States, but its exploration for shale gas is at an early stage and for shale oil has barely begun.

Hess Corp, which has experience with shale oil in North Dakota, signed the deal on Tuesday to explore and develop the 800 square-kilometre Malang block of Santanghu basin in China's northwest region of Xinjiang. The contract follows a joint study by the two firms.

"Shale oil is a tough nut to crack as there are very limited data on it," an official with a global energy company said. "There aren't that many opportunities for foreign firms as China has only offered a few blocks (for joint study)."

Royal Dutch Shell (RDSa.L) and U.S. firm EOG Resources Inc (EOG.N) were interested in the same basin, but only Hess officially entered a joint-study agreement, industry officials said.

Hu Wenrui, former vice president of PetroChina, said Chinese companies have so far drilled about 20 shale oil exploratory shale oil wells, mostly in northern China's Ordos basin.

"China has done very preliminary evaluations on shale oil resource, much less work compared with shale gas," Hu said.

"But longer-term, the trend looks fairly clear that wherever the conventional resources are abundant, the unconventional should follow."

In March 2012 Shell landed the country's first shale gas production-sharing contract, also with PetroChina, to develop a block in Sichuan. The global oil major has said it will step up drilling in China this year and next.

China has not drawn up specific investment policies to guide international energy companies on developing unconventional oil and gas resources.

Both the Hess and Shell contracts are expected to follow the existing practice in China for conventional oil and gas development, industry officials say. Those contracts normally last 30 years, with the foreign party bearing all the cost of exploration, and the Chinese firm has the right to back in with a maximum 51 percent interest during the production stage.