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China Petroleum and Chemical Corporation, or Sinopec (SNP - Analyst Report) and Henan Provincial Coal Seam Gas Development and Utilization Co. were awarded a shale gas block each by the Chinese government in its first auction of the unconventional gas resource.

The auction was initiated last week, offering four blocks to six Chinese companies for the development of its potentially huge unconventional gas resource. Out of these, two blocks –– Nanchuan and Xiushan –– are near the southwestern city of Chongqing. However, bids for the other two blocks were cancelled as they were very few in number.

Sinopec has been selected to explore the Nanchuan block, while Henan Coal Seam Gas has been contracted for the Xiushan block. With an area of 2,198 square kilometers (848 square miles), the Nanchuan block includes the Chongqing municipality and Guizhou province in the southwest. The Xiushan block, spanning Chongqing, Guizhou and Hunan, covers an area of 2,039 square kilometers (787 square miles).

Sinopec intends to spend approximately 591.1 million yuan ($91 million) for exploration activities in the Nanchuan block, while Henan Coal Seam Gas is expected to invest 247.6 million yuan ($38.1 million).

With an objective to popularize the use of gas, China aims to speed-up shale-gas development activities. According to the U.S. Energy Information Agency, as of March 2011, China possessed 36.1 trillion cubic meters (1,275 trillion cubic feet) of technically recoverable shale gas reserves while the U.S. came in second with 24.4 trillion cubic meters.

China’s impressive economic growth and huge shale gas reserves have significantly increased its demand for oil, natural gas and chemicals. This growth momentum presents attractive opportunities for industry players, like Royal Dutch Shell Plc (RDS.A - Analyst Report), BP Plc (BP - Analyst Report), Hess Corp. (HES - Analyst Report) and Newfield Exploration Co. (NFX - Analyst Report), which can meet the country’s fast-growing energy needs.

Although overseas companies are not entitled to participate in any Chinese auctions for shale areas, they are allowed to form local ventures. Chevron Corp. (CVX - Analyst Report) and BP are in discussions with China Petrochemical Corp. and its affiliate Sinopec. Norway’s Statoil ASA (STO - Analyst Report) also intends to acquire stakes in shale-gas assets in China. Shell is currently exploring the Jinqiu block in southwestern Sichuan province with China National Petroleum Corp. (CNPC).

Sinopec, with its head office in Beijing, China, is one of the largest petroleum and petrochemical companies in Asia. The company is the second largest crude oil and natural gas producer, and the largest refiner and marketer of refined petroleum products in China.

The company is also the largest producer and distributor of petrochemicals in the nation. Being one of the two integrated oil companies in China, Sinopec is well positioned to capitalize on the favorable trends.

We maintain our long-term Neutral recommendation for Sinopec, which retains a Zacks #1 Rank (short-term Strong Buy rating).

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