What does China want with south Texas? Hint: cleaner energy know-how

Drilling shale to capture oil and gas is a technology that China, which burns a lot of coal, is eager to learn. That's why it's a partner in a south Texas 'fracking' project.

By , Correspondent

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    A Petrohawk Energy Co. natural gas drilling site is seen at the Eagle Ford Shale in McMullen County, Texas on Sept. 30th, 2009.

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Last month, China's thirst for energy came to American shores. On Oct. 11, the government-run China National Offshore Oil Corp. agreed to pay $2.2 billion for access to oil and gas assets in south Texas – marking China's first successful energy investment in the American market.

It's the latest recognition that south Texas – long overlooked by the US energy industry – is becoming an important frontier in what one official calls the "gold rush of the 21st century." A host of energy companies from Norway to India have already made deals in this sparse land of tall grass and Texas mulberry.

This region offers plentiful natural gas and oil locked in shale rock formations. But until recently they were difficult and expensive to tap. Since 2000, however, the United States has become a leader in fracturing these shale formations and collecting the trapped fossil fuels – a process called hydraulic fracturing, or "fracking."

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This is why China and other countries have invested nearly $5 billion this year in south Texas drilling projects. They're not looking to ship American natural resources back home, but to learn how to do hydraulic fracturing themselves.

It's a development that could have a major impact on global energy.

With huge shale reserves underfoot, China and India – two of the world's heaviest coal users – could reduce their carbon emissions, since natural gas burns 40 percent cleaner than coal. For the US and Europe, it's a chance to become less dependent on imported natural gas.

The rush is on, and as the world conducts experiments in retrieving this new resource, one of the most influential laboratories lies in the heart of Texas.

In La Salle County, located halfway between San Antonio and the Mexican border, stars used to be all that illuminated the night. Today, bright orange flames flicker on the black horizon, the result of burn-off from new natural-gas and oil wells that have popped up since 2008. That was when the 400-mile-long Eagle Ford shale, a swath of rock stretching from Laredo northeast toward Houston, was discovered.

Though not nearly as large as other US gas plays – an industry term for exploration areas – Eagle Ford offers cheap land, low population density, and an oil- and gas-friendly state government. These are advantages for energy companies interested in fracking.

Overnight, some area residents have become millionaires after leasing their mineral rights to corporations.

"People [in Texas] are amenable to oil and gas," says David Victor, an energy expert at the University of California, San Diego. But "as you move out of those areas where people aren't familiar with shale gas," fracking operations attract antidrilling interest groups "like flypaper."

New York, for one, effectively placed a moratorium on shale-gas drilling after a public outcry over concerns that chemicals used in fracking are contaminating the ground water.

Meanwhile, the Eagle Ford play has only gained momentum as the industry looks to tap shale formations. Indeed, the advent of fracking has increased US natural-gas reserves nationwide to their highest level since the mid-1970s, according to the US Energy Information Administration.

Currently, natural gas provides about 20 percent of US electricity production; coal accounts for nearly half. But shale gas "is a complete game changer," former BP chief executive Tony Hayward said at the World Economic Forum in January. "It probably transforms the US energy outlook for the next 100 years."

This innovation hasn't spread widely around the globe, though. American efforts still accounted for three-quarters of the world's unconventional drilling in 2009, according to the International Energy Agency.

But international investment in US operations has skyrocketed in the last year, and Eagle Ford has been the focal point.

Private companies from India, Canada, and Norway were the first to put funds in, but the most recent agreement – the $2.2 billion investment by Chinese government-owned CNOOC in Oklahoma-based Chesapeake Energy – has made the biggest splash.

It wasn't CNOOC's first attempt to enter the American energy market. A 2005 bid to take over California oil company Unocal was withdrawn after pressure from Congress against the deal.

"The Chinese had a bruising experience with Unocal because they didn't understand the politics," says Mr. Victor. "I think this is a toe in the water to see what is possible."

In return for capital, these foreign companies will learn how the new fracking technology works and can start to apply that knowledge to their own shale resources back home.

The results could be far-reaching. China could reduce its dependence on coal power and significantly curb emissions, which is what the US sought when the two countries signed a shale-gas initiative in 2009. India may sign a similar deal with the US during President Obama's trip there Nov. 5-8.

"For countries that rely on coal, if they can move to gas, it would have an unbelievable impact on global warming," says Victor.

The potential applications of more-plentiful natural gas are not clear. Some environmentalists worry that it could harm development of renewable energy sources. But expectations are high.

"Shale is the gold rush of the 21st century," Ewa Zalewska, a geology director in Poland's environmental ministry, told The Wall Street Journal in June. "However, it is too early to answer all the questions."

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