Energy major Royal Dutch Shell Plc. (RDS.A) has agreed to jointly develop a natural gas project in China with the country’s state-owned entity China National Petroleum Corporation, also known as CNPC. The financial terms of the transaction were not disclosed. 

As per the 30-year deal, which is subject to clearance from the Beijing government, Shell and CNPC will examine and appraise the potential to develop so-called ‘tight gas’ in a 4,000 square kilometer area in the Jinqiu block of central Sichuan Province. The gas deposits are expected to produce 2 – 3 billion cubic meters of gas annually, with Shell taking the majority share in exchange for all the exploration risks. 

An unconventional source of energy, tight gas is similar to shale deposits and is locked in rock formations that must be cracked open to exploit natural gas reserves. Tight gas reservoirs can be very large, and production can last for decades. 

Shell is already involved in a tight gas project in China. Under an existing arrangement, Shell and PetroChina (PTR), a subsidiary of CNPC, operate a tight gas field in the Ordos Basin in northern Shaanxi province. Commercial production from the field started in 2007 with current volumes estimated at 3 billion cubic meters of gas per year. 

Also, late last year, Shell and PetroChina signed a joint assessment agreement to develop shale gas in Sichuan . Work began in Jan 2010 in the Fushun block that covers another area of approximately 4,000 square kilometers. 

Shell’s CNPC deal further strengthens the company’s ties in China and follows its joint takeover bid with PetroChina earlier this week for the Australian gas producer Arrow Energy Ltd. 

We see this transaction as part of Shell’s long-term strategic plan to focus on growth in its gas business. In line with other supermajors like ExxonMobil Corp. (XOM) and Chevron Corp. (CVX), Shell sees natural gas playing an important part in its future. The company’s targeted volume growth (11% by 2012) will be achieved primarily by new natural gas projects. Shell said that it expects share of natural gas to rise to 52% of total volumes by 2012.
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