China's state-owned energy company, China Petroleum & Chemical Corp. or Sinopec (SNP) has come across massive gas reserves during the drilling of exploration wells in the Yuanba field, in Sichuan province.

Following large scale fracturing, Sinopec struck shale gas with an estimated daily flow of 11,500 cubic meters at a depth of 4,035-4,110 meters in the gas-rich Sichuan basin. The gas was found in the Yuanba-9 well in the northeastern part of the basin, while the Yuanba 21 well has a production capacity of 507,000 cubic meters of gas a day.

Per China's Ministry of Land and Resources, the country holds a projected 25.08 trillion cubic meters of potentially recoverable shale gas reserves. Till date, China has not initiated any commercial production of the unconventional energy source.

Major energy players all over the world are working on the usage of new technologies to extract the unattainable shale gas in China and hoping to evidence a rapid increase in gas output.

Yuanba is a major producer of conventional natural gas in the Sichuan basin in Sinopec's portfolio. Following the commissioning of the neighboring Puguang field in 2010, development focus has shifted to Yuanba. Per estimates, production capacity at Yuanba is expected to reach 3.4 billion cubic meters annually by the end of the ongoing five-year economic plan in 2015.

Natural gas business forms a potentially lucrative growth area for Sinopec, which is expected to witness strong growth in the coming years. The new find in Yuanba is also expected to augment its earnings over the next few years. Going forward, Sinopec intends to invest in natural gas exploration and development in northeastern Sichuan and the Shandong liquefied natural gas (LNG) project of China. Natural gas blocks, such as Yuanba, southeast Sichuan and Xinchang, will also see enhanced development activities.

Sinopec holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. Longer term, we maintain our Neutral recommendation. The company faces competition from CNOOC Ltd. (CEO).