China’s Purchase of U.S. Fracking Company will give it Advanced Technology

As the U.S. ramps up to its presidential election, both Republican candidate Mitt Romney and incumbent President Barack Obama have increasingly made a "get tough" approach with China a part of their campaign platforms.

On 25 October, in front of a rapturous audience, Romney told supporters in Ohio, "Look, we can compete with any nation in the world so long as we're playing on a level playing field. And I'm going to make sure China doesn't cheat."

President Obama, during his third debate with Romney on 22 October said, "With respect to China, China is both an adversary, but also a potential partner in the international community if it's following the rules. So my attitude coming into office was that we are going to insist that China plays by the same rules as everybody else."

But one item the pair apparently agree upon is that Chinese investment in most American industries is a good thing, so it should come as no surprise that on 26 October
China's Lanzhou Haimo Technologies Co. announced that its subsidiary Haimo Oil & Gas LLC will buy a 14.29-percent stake in Houston-based Carrizo Oil & Gas's Niobrara shale oil and gas assets in Colorado for $27.5 million.

Under the terms of the deal, Lanzhou Haimo Technologies Co. will acquire roughly 6,000 acres, or about 210 square miles, of territory located primarily in Colorado's Weld and Adams counties in as well as associated infrastructure, including oil and gas wells, according to a statement filed to the Shanghai Stock Exchange. Carrizo, which holds approximately 60,000 acres in the Niobrara basin, currently produces 1,850 barrels per day (bpd).

So, what is Beijing's covertly cunning policy in making such a purchase?

To suck the Rockies' hydrocarbon resources dry and ship them to China?

Federal law is extremely complex for exports of domestically produced U.S. hydrocarbon foreign sales, and the Niobrara basin, currently produces 1,850 bpd, is hardly likely to make a dent on Chinese energy use, much less the fact that there are currently no Colorado pipelines to the U.S. western coast that could allow its transfer.

So, why buy Haimo Oil & Gas LLC?

Can you say "technology transfer?"

The U.S. is the world leader in producing natural gas and oil from hydraulic fracturing, or "fracking," an environmentally contentious practice that is acquiring more and more domestic political opposition.

And China has embraced fracking with a vengeance. According to China's National Development and Reform Commission, the country's top economic planner, China is aiming to produce 6.5 billion cubic meters of shale gas by 2015, as well as investing an estimated $63-98 billion to drill 20,000 shale gas wells by 2020.

And the U.S.? Fracking is now so rampant that four of the biggest service companies, including Halliburton and Schlumberger Ltd., will see their collective third-quarter operating profit drop by more than $1 billion in North America compared to 2011, according to estimates from Houston-based Tudor Pickering Holt & Co. PacWest Consulting Partners LLC, a Houston-based industry adviser, estimates that prices charged for fracking services in 2012 are expected to drop 14 percent this year and another 8 percent in 2013.

Accordingly, Chinese interest in buying into the U.S. fracking industry must be the answer to many oil patch CEO's prayers.

And Beijing's prayers as well, as the International Energy Agency recently reported that China, which consumed roughly 4.7 million barrels per day a mere decade ago, will end the year by importing about 9.7 million bpd, a major factor in pushing global oil prices from near $30/barrel in 2000 to 2012 prices ranging between $80 and $110.

China's oil imports for 2012 are set to reach 500 million tons, a 5 percent increase from 2011, during which, according to China's National Bureau of Statistics, domestic production was 204 million tons of crude oil, up only 0.3 percent from 2010.

So, fracking to the rescue. China has roughly 240 billion tons of accessible oil shale reserves, according to data developed by China's National Energy Administration, and roughly 10 million tons of oil can be produced from these reserves annually.

Accordingly, despite China-bashing being the political flavor of the month in Washington, expect the Lanzhou Haimo Technologies Co. purchase to sail through with nary a mention.

After all, to paraphrase President Eisenhower's Secretary of Defense, former General Motors president Charles Erwin Wilson, "what was good for the country was good for General Motors and vice versa" - only in this case, its Vice President Dick Cheney's former firm Halliburton as well as Schlumberger doing "good" for the country, who, looking at their slumping bottom line, will no doubt shortly be seeking to assist China's Lanzhou Haimo Technologies Co. in its new acquisition.

By. John C.K. Daly of Oilprice.com