China Has Recognized The Importance of Unconventional Oil -- Meanwhile, The US Looks to Shut It Down

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In early January, China Petroleum Corp. struck a multi-billion dollar deal with Devon Energy for five major shale oil and gas plays.  This is the third billion-dollar-plus investment in U.S. oil fields by a foreign oil company in the last three weeks — Spain’s Repsol YPF (REP.MC) entered into a $1 billion pact with SandRidge Energy Inc. to jointly develop oil fields in Kansas and Oklahoma, and France’s Total SA paid $2.32 billion to Chesapeake Energy for a stake in its Utica shale discovery in Ohio.

These foreign firms are on a buying spree in a mission to hedge against volatile energy prices and uncertain supplies. The interest in the shale plays stems from an asset acquisition strategy, but also from a move to obtain the technology and the management expertise that must be in place for shale drilling.

In an effort to emphasize the importance of shale exploration, the Chinese government has categorized shale gas as a separate natural mineral resource, as opposed to including it in the general oil and gas category.  In June 2011, the government held its first auction for shale plays and a second one will soon follow.

In the U.S., we are dealing with a conundrum.  The origins of fracing technology and horizontal drilling are not new and the technology has finally come of age.  The data makes a powerful statement.

In July 2011 for instance, the Bakken shale produced 424,000 barrels of oil a day (b/d) compared to 453,000 b/d in Alaska.  The Eagle Ford play in Texas produced 190,000 b/d in August 2011, compared to 3,100 b/d two years ago, and this output is expected to quadruple in the next five years.