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Sinopec, Royal Dutch Shell Team Up for Shale Oil Development

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Sinopec SNP has inked an agreement with Royal Dutch Shell plc (RDS.A - Free Report) to foray into the shale oil sector in China.

The agreement, which is a part of China’s early efforts to unlock the potentially massive unconventional resource, relates to the joint study of a shale oil block in east China's Shengli oilfield.

Sinopec has agreed with Royal Dutch Shell to examine the Dongying trough of Shengli in Shandong. The companies did not disclose any further details. Royal Dutch Shell is one of the few international oil and gas companies to venture into China’s shale oil sector.

The Dongying trough is part of the Bohai Rim basin. Per sources, a leading oil and gas group — China National Petroleum Corp (CNPC) — is  developing another small shale oil field in the basin that has an annual output of 50,000 tons in 2019.

Recently, Royal Dutch Shell abandoned operations in Sichuan province in the southwest after spending nearly $1 billion, thanks to dismal shale gas drilling results.

Even after more than 10 years of work, the development of vast shale gas resources in China is in early stages. In 2018, shale gas production contributed only 6% to total gas output. Also, shale oil contributed less than 1% to China’s crude output. Per experts, the difficult geology and large development costs have put challenges across the development of shale gas and made it time-consuming.

While shale gas resources are primarily located in Sichuan, most of China’s shale oil is concentrated in eastern regions — the Songliao and Bohai Rim basins. North China’s Ordos and Junggar basins are also projected to hold huge shale oil resource.

In 2013, Hess Corporation’s HES failed to develop the Malang block of Santanghu basin in the northwest region of Xinjiang. The company abandoned the block around late 2014 due to poorer-than-expected drilling prospects and decline in global oil prices.

Sinopec expects that Royal Dutch Shell’s expertise in shale oil exploration is likely to help offset the depletion of reserves in the Shengli oilfield.

Zacks Rank & Key Picks

Currently, Sinopec carries a Zacks Rank #4 (Sell).

Another better-ranked player in the energy space is Antero Resources Corporation AR, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Antero Resources is an independent explorer, primarily engaged in the acquisition and development of natural gas, natural gas liquids as well as oil resources in the Appalachian Basin. The company’s earnings beat the Zacks Consensus Estimate in two of the last four quarters.

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