U.S. takes a crack at China's tough shale

China is looking to the West - and especially to Texas - as it seeks to unlock its vast shale formations in hopes of launching an American-style energy revolution.

Facing stubborn rock and high costs, Chinese oil companies are giving U.S. firms a bigger stake in exchange for the tools and technology of hydraulic fracturing, which helped turn American production around and gave the nation new status as an energy power.

Many of those tools are made in Texas, or nearby.

They include cocktails of sand, water and chemicals, and the high-pressure pumps that blast those payloads underground to fracture shale formations and release oil and gas.

While hydraulic fracturing has engendered environmental opposition and even some local bans in the United States, the Chinese government is eager to reduce the country's thick air pollution. It hopes the nation's shale might provide enough cleaner-burning natural gas to replace coal in power plants.

Through a series of new joint ventures, Halliburton, FTS International and others with major operations in Texas are exporting the technological breakthroughs in U.S. hydraulic fracturing, including pressure pumps that use less water and multiwell drilling from platforms called pads that can cut down on an operator's footprint.

The advances, the companies say, could speed up China's sluggish quest to redo the U.S. energy gusher, tapping resources in Chinese locations ranging from a remote desert to a city larger than Houston.

Making inroads in China's rising shale gas industry also could prop up the Texas oil field services firms in the Eastern Hemisphere's sturdy drilling market, where they're already servicing the state-owned oil giants in Saudi Arabia and other Middle Eastern states.

Boost for U.S. companies

Halliburton said it expects fourth-quarter profits to reach 20 percent growth in the Eastern Hemisphere. The expansion of its business in China isn't likely to move the needle much for its $5 billion overall business in the Middle East and Asia, but it's a bigger foothold in one of the world's fastest-growing economies.

The China work might be more significant for Fort Worth-based FTS International, a private well completion company that has formed only a handful of international joint ventures, including one in June with China's Sinopec.

"This joint venture in China is an important first step that can help substantially expand FTSI's overall business and drive significant financial growth," spokeswoman Pam Percival said in an emailed statement.

China's shale basins contain gas trapped in high-pressure formations more than 10,000 feet deep. They're generally hotter, farther underground and more complex than those in the major U.S. shale plays. In Pennsylvania's Marcellus Shale, for example, wells typically are drilled 5,000 to 9,000 feet deep and cost about half as much as Chinese shale wells, said Andrew Utz, an analyst with Wood MacKenzie.

One big prospect is in the harsh, largely uninhabited Xinjiang desert of Northwest China, where Halliburton has entered a joint venture with Chinese oil company STP to fracture shale rock in the Tarim Basin. That desert could hold a third of the country's unconventional resources.

The deal could help STP take on the desert's biggest challenge - water. It's scarce in Xinjiang, and hydraulic fracturing requires lots of it.

Halliburton has designed pressure pumps that can fracture with less water. And the company has developed water-recycling technology, using components made at a manufacturing plant in Oklahoma, that could "help in developing the assets sustainably," said Jonathan Lewis, Halliburton's senior vice president of completion and production.

"That's why the Chinese have come to us," Lewis said. "In some of these more challenging areas, they clearly are willing to work with others. The ramp up won't be instantaneous; it's going to be a five- to 10-year journey."

Heavily populated areas

Meanwhile, in China's teeming cities, which sit over some of the country's most promising shale plays, multiwell pads and wells reaching horizontally through miles of rock could help operators curb their footprint.

In June, FTS International struck a deal to form a joint venture with Sinopec to develop the Sichuan Basin in southwest China, where the Fuling Shale formation sits near Chongqing, a city of 6 million in south central China.

The joint venture, SinoFTS, expects to be in operation next year.

Last month, the Chinese government OK'd state-owned Sinopec's plans to begin the first commercial development of that field. But the estimated bounty of 3.8 trillion cubic feet of natural gas is trapped within a 100-square-mile area near the giant city.

Sinopec's Fuling gas field is just a tiny piece of one of the country's biggest shale gas basins, and with such heavy concentrations of hydrocarbons embedded in small locations, it's hard to extrapolate how much energy China will be able to draw from its shale reservoirs.

The U.S. Energy Information Administration estimates China has the largest technically recoverable shale gas reserves on the planet, but it only extracted 1.8 billion cubic feet of gas in 2012, mostly from test wells in central China. The U.S., by contrast, produced 24 trillion cubic feet that year, according to the Energy Department agency.

A top Chinese energy official said last week that the government has cut its previous target for shale gas production in half, a sign of fading optimism that the country can overcome its technology constraints, according to an industry-backed Chinese media outlet. It's revised goal is to gather 1.1 trillion cubic feet of gas by 2020.

But drilling and completing some shale gas wells in China can run $12 million to $15 million, about twice the cost of a well in the gas-rich Marcellus Shale in Pennsylvania.

That's part of the economic equation that so far has held back China's efforts and prompted it to turn to U.S. oil field services companies.

It's also another example of the kind of problem U.S. technology can help solve.

Houston-based Halliburton says its Cypher reservoir modeling software, which went to market late last year, could make it easier to pinpoint sweet spots within China's shale reservoirs. That can mean more production from fewer costly wells.

Anish Jain, vice president of finance and strategic initiatives for FTS, said mountainous regions with narrow roads and small well pads in China will require workers to move U.S.-built fracturing equipment on more nimble, all-wheel drive trucks, rather than the tractor-trailers used in the United States.

The tight-turning trucks will carry the same high-pressure pumps the company uses in the United States, along with valves and other equipment manufactured in Fort Worth.

"The deeper formations can be more challenging and expensive to drill," he said. "Being economical with our operational footprint is imperative."

Jain said language and culture could be one of the biggest challenges in making the partnership work. The venture will have to operate in a "bilingual environment," and it is planning to start training Chinese nationals in Texas to work closely with English-speaking crews, he said.

Uncertainty remains

It's difficult to predict how successful China will be in replicating the U.S. shale boom, or how smooth its joint ventures with American firms will be under a legal system that does not protect intellectual property rights as robustly as do courts in the United States.

"It's going to be interesting to learn how protective the service companies will be of their intellectual property when they market potential cost-saving technologies," said Robert Clarke, an analyst with energy research firm Wood Mackenzie.

He said drilling costs are down 35 percent from two years ago as Chinese operators join forces with North American services companies, and the partnerships are aiming to reduce costs another 15 percent.

In general, however, Wood Mackenzie urges caution.

"Our view on China's shale is, over the longer term, uncertainty increases exponentially," Clarke said.