Sinopec, Conoco Shale Gas Venture

China Petroleum and Chemical Corporation ( SNP - Analyst Report ) aka Sinopec) has inked an agreement with the U.S. energy company ConocoPhillips ( COP - Analyst Report ) to conduct a joint unconventional oil and gas development study. Although the financial details were not disclosed, this collaboration between the two groups is expected to last for two years.

The deal calls for the fifth-largest oil company in the world, Sinopec, to carry out the research program through its affiliate − Sinopec Exploration Southern Company − to explore, develop and produce shale gas in association with ConocoPhillips' China. The companies will perform their activities in the shale gas rich Qijiang block in the Sichuan basin.

ConocoPhillips will conduct the two-dimensional seismic surveys and drill two wells in a portion of the block spanning 1,513 square miles. Its initiative to explore shale gas in China marks the entry of the third international oil giant, with the others being Royal Dutch Shell Plc ( RDS.A - Analyst Report ) and Chevron Corp. ( CVX - Analyst Report ) . Other overseas oil majors like BP Plc ( BP - Analyst Report ) and Total SA ( TOT - Analyst Report ) are also keen on similar agreements, but are yet to announce any contract.

In recent times, Texas-based energy major ConocoPhillips has shown keenness to enter the Chinese market, with a special focus on the shale sector. Its effort of boosting commercial shale gas output in China will assist the country in meeting its targeted shale gas output of 6.5 billion cubic meters annually by 2015 and 100 billion cubic meters by 2020. In 2011, China did not produce any commercial gas.

China is estimated to hold recoverable shale gas of about 1,275 trillion cubic feet in just two basins, as per the US Energy Information Administration. This actually overshadows the combined reserves in the U.S. and Canada. China primarily intends to lure U.S companies to share their experience in drilling for shale as they lack the expertise in developing shale reserves. This will help it reach its target for 2015. However, the target looks too challenging to be fully accomplished in the current scenario within 2015.

In view of gaining shale-gas know-how, Sinopec completed a $2.44 billion acquisition deal earlier this year for minority stakes in five of Devon Energy Corporation’s ( DVN - Analyst Report ) U.S. shale oil and gas fields.

Both Sinopec and ConocoPhillips hold a Zacks #3 Rank (short-term Hold rating). Longer term, we maintain our Neutral recommendation for the companies.