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China Petroleum and Chemical Corporation (SNP - Analyst Report), also known as Sinopec, along with Royal Dutch Shell plc (RDS.A - Analyst Report) is drilling exploration wells in the largely unexplored central China to examine the shale potential in the region.

The belief that China holds the world’s largest shale gas resource has attracted several oil majors including Shell, ExxonMobil Corporation (XOM - Analyst Report), Chevron Corporation (CVX), Eni SpA (E) and Total SA (TOT - Analyst Report) for unconventional gas exploration in the region. Of these companies, Royal Dutch Shell is the first to secure a production sharing contract.

As part of a three-well exploration program formed to jointly appraise the shale resources at Xiang E Xi (XEX) block, at the junction of central Hunan, Hubei and Jiangxi provinces in east central China, Sinopec and Royal Dutch Shell completed drilling Liye-1 in August.

Subsequent to unsatisfactory results from hydraulic fracturing, Liye-1 well was abandoned. Currently, the duo is drilling the second well, Engye-1, while the third one is also being planned though the timing or location have not yet been revealed. In Jun 2012, both parties entered into a joint study agreement on the XEX block. Sinopec remains the operator of the block.

China is in nascent stages of developing the fuel, and has drilled less than 150 exploration wells. Most of the exploration remains in and around the Sichuan basin in southwest China and commercial output is insignificant.

China’s impressive economic growth has significantly increased its demand for oil, natural gas and chemicals. This growth momentum presents attractive opportunities for industry players that can meet the country’s fast-growing energy needs. Being one of the two integrated oil companies in China, Sinopec is well-positioned to capitalize on these favorable trends.

Sinopec carries a Zacks Rank #4 (Sell).

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