China Petrochemical Corp announced that it would begin producing gas from shale reserves in Sichuan in mid June. [1] China's push to develop its shale reserves could provide a major boost to oilfield services providers such as Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) as the companies battle an industry oversupply situation in the North American pressure pumping market. Oilfield services players are actively looking to export the shale gas revolution in the U.S. to foreign markets in Asia and in Latin America. The Chinese government has made shale exploration one of its priority items in its latest five year plans. Shale exploration in the country could boost the rig count in the region as well as the average service intensity at each rig, boosting revenues for companies like Schlumberger.

We have a $93.18 price estimate for Schlumberger, which is at a 40% premium to its current market price.

Chinese development

China sits over massive shale gas reserves that are yet to be exploited by the energy hungry country. Chinese demand for natural gas is set to soar over the coming years and the government is looking to develop local sources to reduce dependence on imports. The Chinese government had earlier unveiled plans to produce up to 6.5 Billion cubic feet (Bcf) of natural gas from shale formations by 2015 and boost production to 10 times the level by the end of the decade. (See: Halliburton Jockeys for Role in China's Shale Exploration) In comparison, in 2010, the U.S. produced 138 Bcf of gas from shale formations. Shale exploration has transformed the energy industry in North America, by pulling down gas prices to their lowest point in the past 10 years and boosted revenues for oilfield services players like Schlumberger, as the process of shale gas extraction is a lot more service intensive than the extraction of conventional gas resources.

China's push into shale exploration could be a major source of revenue for oilfield services players over the next few years. The Chinese government is encouraging local players to partner international firms in efforts to develop local shale reserves in order to access shale technology. Chinese companies have also invested in shale assets situated within the U.S. to gain more exposure to the sector. Shale exploration in China has the potential to increase the spending on exploration and production activity in the region and help Schlumberger export its technology to markets that are not impacted by the supply glut and the industry overcapacity situation in the North American market.