CNOOC sets strategies to reduce costs to $10/bbl by 2000

Reform is becoming more difficult

Wang Ming Wu
Contributing Editor
Beijing

China National Offshore Oil Corp (CNOOC) was reorganized into two groups launched by China's government late in 1998. CNOOC was allowed to retain the original organization.

Up to November 1998, CNOOC had signed 137 oil contracts and agreements. Forty are well underway covering a concession area of about 150,000 sq km. Sixty-eight foreign companies from 18 countries and regions have contracts. These have brought a cumulative foreign investment of nearly US$7 billion in direct exploration and development.

Geological reserves increased by 1.7 billion tons of crude oil and 230 billion cu meters of natural gas from both cooperative and wholly-owned exploration. Twenty-four oil and gas fields were completed and put onstream. Thirteen cooperative oil and gas fields are under production and account for 85% of China's total yearly output from offshore oil and gas fields.

Foreign cooperation is active over 69,000 sq km of China's offshore area. Foreign companies have drilled a total of 300 wildcats and approval wells, and collected 420,000 line-km of seismic. Since 1978, CNOOC's annual output rose to 16.30 million metric tons (mt) from less than 100,000 tons, gross assets rose to RMB ¥31.8 billion from ¥1.7 billion. Personnel productivity rose to ¥370,000 from ¥10,000.

Severe situation

The whole country and all offshore oil enterprises are faced with unprecedented difficulty. China experienced the Asian financial crisis and global economic depression at the same time. This pressure has forced China to initiate reforms of state-owned enterprises. It is a difficult adjustment.

Offshore oil, after undergoing a period of rapid development, saw a sharp fall in international oil prices resulting in a ¥3 billion decrease in crude oil income over 1997. This made the enterprise almost unprofitable. It also happened at a critical juncture when the upstream and downstream sectors of the offshore oil enterprises were being integrated.

Offshore oil enterprises were in a better situation than the majority of domestic state-owned enterprises of a few years ago. They now find themselves in the same tight corner that resulted in a 10% decrease in wages for CNOOC personnel at all levels.

In mid-1998 CNOOC used a series of effective measures to reach its financial and production targets and avoid losses. CNOOC is threatened with a loss in 1999 if oil prices stay at US$10/bbl or so.

Reform is becoming more difficult. Construction is hard with large-scale investments needed. The funds gap will be wide in the coming five years. After that, assets are likely to rise. Now, some oil majors are expanding their strength through mergers that will result in even more competition for world oil markets. Domestic competition is also intense.

New era opens

The Offshore Oil Joint-Stock Co, the first one to sell Class A stock, proclaimed its founding in Tanggu, near the major city of Tianjing, in December, 1998. Offshore oil development is entering a new stage. The joint-stock company was co-initiated by CNOOC, Bohai, Nanhai West, Nanhai East, and Donghai.

CNOOC included all fixed assets and associated assets of blocks A, B, and J in the SZ36-1 oil field, which is China's largest offshore oil field.

Assessed net value of total assets is RMB ?772 million, of which CNOOC's portion accounts for 95%, the rest 1.25% each.

The joint-stock company planned to put its stocks on sale in 1999 for the first time and expected to raise ?2 billion in funds, which would be put into the second phase of the SZ36-1 oil field project. It will produce 5.1 million metric tons/year of oil upon completion.

This move will set up a totally new management system, further normalize management, and increase activity. What is more, it will encourage asset management and set capital in motion to husband energy, laying the foundation for much more offshore development.

New strategies

CNOOC has created several new growth strategies that will be employed this year:

• An economic returns strategy: CNOOC established an Investing Decision Committee to make decisions democratically and scientifically. Anything can done but not without economic returns.
• A long-term cost-reduction strategy: Only with a direct cost of less than US$8/bbl, and a total cost of US$10/bbl, can CNOOC be qualified to compete in the international market. A complete set of new economic mechanisms needs to be created. Total wages in all units are to be linked to economic returns. Units with continuous losses will be paid less, even closed down.
• An intensive effort to find natural gas: The South and East China Seas will be the focus over the next 3-5 year period.
• Further expansion of external cooperation: CNOOC will seek new approaches and strive to replace foreign staff on platforms with Chinese.
• A hi-tech strategy for science and technology: This will increase production while reducing costs and carrying forward overseas development. CNOOC has set nine practical questions for scientific research.
• A staff and worker quality strategy.
• A partial sale of CNOOC: This would reduce costs and help transform the company to compete internationally.

Management goals

The main goal is to strengthen management and reduce cost/bbl to below US$10 by the year 2000. This will be done by taking new ideas, new technologies, new methods, standardization, simplification, and products nationalization as the leading factors. Platform personnel in CONHE, CONHW, and Bohai will be further optimized. The number of related onshore personnel will be reduced.

External cooperation in offshore oil exploration and development should expand. In recent years, foreign companies' success ratio for exploration was lower than that of China, mainly due to the limited study of regional geology. Geological reserves from small oil fields on the periphery of existing cooperative fields are valuable and should be exploited.

Nine cooperative oil fields came onstream and produced 10 million mt/yr for three years through 1998, accounting for 78% of CNOOC's total output and over 60% of CNOOC's total operation cost. CONHE will continue shouldering heavy loads in both production and cost-reduction through the turn of the century.

CONHE set a target of producing 10.70 million mt in 1999. Filling a 400,000-mt gap is a key goal.

Half of the cooperative oil fields have passed their peak, the decline rate is unchangeable, and equipment troubles have had serious effects on field production. It is impossible to see any change in the output drop from all fields. Under a program encouraging peripheral oil field development, Huizhou 26-2 oil field development will be quickened once the Huizhou 32-5 oil field comes onstream in December.

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