BEIJING China's Sinopec Corp (0386.HK) and U.S.-listed Weatherford International (WFT.N) are in advanced talks about forming a joint oilfield service company, as the world's top energy consumer seeks overseas expertise to help unlock its vast shale resources, said people with direct knowledge of the matter.
The proposed joint venture would likely be the largest of its kind in China, aiming to marry Weatherford's technological know-how with the Chinese oil major's (600028.SS) potential to grow in a nascent shale oil and gas sector.
China, widely thought to hold the world's largest technically recoverable shale gas resources, hopes to replicate the shale boom that has transformed the U.S. energy landscape. It wants to build on its success developing fields of easier-to-extract "tight gas", but faces technological and environmental challenges due to complex geology, a high population density and water shortages.
That offers opportunities for oil service specialists such as Weatherford, Schlumberger (SLB.N), Halliburton (HAL.N) and Baker Hughes (BHI.N), all of which have been in China for decades but have largely focused on exploring conventional oil and gas.
Weatherford, valued at $11 billion and one of the industry's most acquisitive firms, about a year ago started talks with Sinopec Oilfield Service Company (SOSC), a new upstream service arm of the Chinese energy giant, to explore the possibility of a joint venture. Talks have now entered an advanced stage, two people with direct knowledge of the matter told Reuters. They didn't want to be named as they are not authorized to speak to the media.
An alliance, likely to include integrated services from drilling and well construction to well completion and equipment manufacturing, will probably be announced by the end of this year, if negotiations are successful. The joint venture would likely be controlled by the Chinese firm and would have registered capital of at least $50 million, said one of the people, an industry executive.
SOSC declined to comment, while Weatherford was not immediately available to answer questions.
MUCH TOO YOUNG?
Weatherford, with $15 billion in global revenue in 2012, also wants to "support" the Chinese partner's planned initial stock offering that is likely to be launched as early as next year, the executive said without elaborating. "Local partnership is an essential direction of growth for Weatherford (in China)."
Apart from providing specialist tools and managerial skills, Weatherford, which last year raked in $300 million in revenue from China services, would contribute expertise in areas such as high-pressure, high-temperature drilling.
SOSC, incorporated last December and with revenue that almost matches Weatherford's, is currently merging Sinopec's eight regional service arms into a company employing 140,000 people.
Some industry participants said a joint venture with a heavy focus on shale could struggle as China's shale sector is still very young.
"A key question is: is there enough revenue to be generated under such a JV? Without that the Chinese had better not expect to gain much know-how," said an executive with a Chinese oilfield service company.
China, the world's fourth-largest natural gas consumer, has so far drilled fewer than 150 shale gas wells with tiny commercial production. Industry officials say any significant increase in output is unlikely until the latter half of this decade.
Weatherford, with headquarters in Switzerland, had detailed discussions about a decade ago with China's offshore oil and gas specialist CNOOC Ltd (0883.HK) about setting up a joint venture. That didn't happen due to differing strategies, said the Chinese executive who had direct knowledge of the situation.
But Sinopec, Asia's top refiner, has a much smaller and nimbler exploration department than rivals such as PetroChina (0857.HK), the country's largest oil and gas producer. Sinopec is also eager to grow its shale business both in China and abroad.
Sinopec operates vast onshore acreage including part of the Sichuan basin, the country's top gas region, and has invested in U.S. shale assets in partnership with Devon Energy Corp (DVN.N) and Chesapeake Energy Corp (CHK.N).
The impetus for the talks came from senior management at both firms, the sources said. Sinopec Chairman Fu Chengyu, who embarked on restructuring the company's sprawling service divisions shortly after taking up his post in 2011, was key in initiating the possible alliance.
The proposed tie-up would be larger than existing service JVs that were mostly set up by China Oilfield Service Ltd (COSL)(2883.HK) in the early days of China's offshore oil development in the 1980s. Each of these specializes in a single service such as supplying drilling mud.
In more recent team-ups, Schlumberger bought a 20.1 percent stake in privately-run Anton Oilfield Services Group (3337.HK) for $80 million last year, and Royal Dutch Shell (RDSa.L) joined China National Petroleum Company (CNPC) in 2011 in establishing Sirius Well Manufacturing Services.
(Editing by Joseph Radford)