Anglo-Dutch behemoth Royal Dutch Shell plc (RDS.A) and state owned China National Petroleum Company (“CNPC”) have come together to form a Global Alliance Agreement. The companies will collaborate and cooperate on future projects in China and overseas. However, none of the companies disclosed the financial details of the deal.
Per the agreement, the two parties also agreed to launch a drilling technology joint venture –– Well Manufacturing –– sharing equal interests. Under the venture, the companies will co-develop an innovative, highly automated Well Manufacturing System (WMS) that is expected to significantly increase the drilling and completion rate of new wells onshore.
The Hague, Netherlands-based Shell intends to contribute its pioneered drilling technologies, used in the North American tight gas operations, for the development of WMS. The joint venture will also avail a majority of its rigs, services and drilling equipment from low-priced suppliers in China.
Shell’s alliance with CNPC goes back a long way. In March last year, the companies entered into a 30-year production sharing deal to jointly develop and produce natural gas in China’s Sichuan basin.
We view these transactions form part of Shell’s long-term strategic plan to capture growth opportunities within the growing Chinese market and its adjoining territories.
Under the long-term growth plan outlined by Shell, annual worldwide production is expected to increase 12% by 2014 (from the 2010 level), fueled by a new wave of project start-ups. Currently, the company is reviewing more than 30 new projects that will likely guarantee upstream growth till at least 2020.
However, as of now, we don't see any obvious catalyst in Shell’s business to significantly push the stock price higher. The company, which faces stiff competition from peers such as BP plc (BP) and Exxon Mobil Corp. (XOM), currently retains a Zacks #3 Rank (short-term Hold recommendation).
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