Chevron Corp. and China Petrochemical Corp. will likely sign an agreement by the end of the year to explore and develop jointly shale gas in southwestern China, a person familiar with the matter said Thursday.
Chevron has identified a gas block in Guizhou province for possible cooperation, close to an area that China Petrochemica, or Sinopec Group, and BP PLC are exploring for reserves of the unconventional fuel, the person said.
Interest in China’s shale-gas reserves—estimated by the International Energy Agency at 26 trillion cubic meters—is rising among foreign companies looking to replicate their success in North America to meet China’s soaring demand for the cleaner-burning fuel.
China hadn’t been able to access these reserves until recently because of a lack of drilling know-how. Shale gas is trapped in relatively impermeable rock, and producers need to crack the tight rock formations using streams of water and chemicals.
John Watson, Chevron’s chairman and chief executive, said in an interview with The Wall Street Journal earlier this week that Chevron is in discussions with Sinopec about cooperating on shale gas in China, but didn’t give a time frame for the talks or indicate the expected location of the block.
A deal would expand Chevron’s footprint in China, which includes the $4.7 billion onshore Chuandongbei project in the southwestern province of Sichuan. That project is expected to come online in the second half of 2011.
Earlier this month, Chevron acquired operating interests in three exploration deepwater blocks in the South China Sea. It also has shallow-water exploration and production assets in the north and south of the country.
China wants natural gas to account for 10% of the nation’s energy mix by 2020, up from about 4% now, as part of an effort to reduce its reliance on heavily polluting coal and crude oil.
This has encouraged its state oil companies to seek foreign help in developing shale gas, mirroring efforts to get its nascent deepwater oil industry and coalbed methane sector off the ground.
China’s first joint development project in shale gas was launched last November when Royal Dutch Shell PLC and PetroChina Co. reached an agreement to develop shale-gas resources in Sichuan.
In June, Sinopec Group said it was targeting 2.5 billion cubic meters of annual production capacity of unconventional gas, including shale gas and coalbed methane, by the end of 2015.
General Manager Su Shulin has said the company will prioritize shale gas exploration and development over other unconventional gas resources.
It has designated 2,000 square kilometers in Kaili, Guizhou province, and 1,000 square kilometers in Huangqiao, Jiangsu province, in eastern China as potential cooperation blocks for BP, Sinopec said in January.
—Jing Yang contributed to this article.