Foreign cooperation and acquisitions add reserves

In the past year, "cooperation" has been the operative word for China's state-owned China National Offshore Oil Corp.

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Cnooc brings Chinese fields into production

Judy Maksoud
International Editor

In the past year, "cooperation" has been the operative word for China's state-owned China National Offshore Oil Corp. The company has exclusive rights to exploit hydrocarbon resources in the offshore areas of China in partnership with foreign enterprises and has been avidly adding to its reserves through cooperation and acquisition.

According to Wei Liucheng, chairman and CEO, the strategy for 2003 builds on that of 2002.

"We will continue to focus on growing prod-uction, adding reserves through exploration and opportunistic acquisitions," he said.

Investing in Australia

One way to add reserves is to buy them, a route Cnooc pursued with a vengeance in the last 18 months. Last year, Qiu Zi-Lei, Cnooc's CFO and senior vice president, announced that the company had set aside $1 billion for acquisitions and expected to secure stakes in Australian and Indonesian gas fields by year-end.

In April 2002, Cnooc purchased the Indonesian assets of Spain's Repsol-YPF for $585 million. Four months later, Cnooc announced it would buy a 5% stake in Australia's North West Shelf gas project. Cnooc secured interest in the NWS project in May 2003, adding nearly 1.1 tcf to Cnooc's gas reserves.

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In the process, Cnooc acquired a 25% stake in the China LNG Joint Venture, a new JV to be established within the NWS project. The company also nabbed 5.3% interest in certain production licenses, retention leases, and an exploration permit of the NWS project. In addition, Cnooc has the right to participate in future exploration undertaken over and above the proven reserves.

The NWS will supply gas to China's first planned LNG terminal in Guang-dong, which will come online in 2006. The NWS group will have a 25% stake in the China LNG joint venture.

Assets in Indonesia

In early February 2003, Cnooc announced that it had completed acquisition of an equity interest in the reserves associated with the Tangguh LNG project in Indonesia.

The project comprises three production sharing contract (PSC) areas: the Berau PSC, the Muturi PSC, and the Wiriagar PSC.

Cnooc acquired from BP an equivalent 12.5% stake in the Tangguh LNG project for $275 million through the acquisition of a 44% interest in the Muturi PSC and a 42.4% interest in the Wiriagar PSC.

Project partners have signed a 25-year LNG supply contract to provide up to 2.6 million metric tons/yr of LNG to the Fujian LNG terminal project in China, beginning in 2007.

"With this transaction we have taken a significant step in executing our natural gas strategy in China's rapidly growing coastal gas market," said Yang Hua, senior vice president of Cnooc Ltd. and president of Cnooc International Ltd. Hua said the acquisition is "consistent with our strategy of prudent and selective international expansion while maintaining our core focus in offshore China."

With all of this activity in the works, Cnooc and two other major state-owned enterprises are reportedly in the midst of more acquisitions in Australia and Indonesia and are also looking at Sudan, Iran, and Canada.

Striking out in the Caspian

Unfortunately, Cnooc's luck did not hold in its bid to enter the North Caspian Sea production sharing agreement (PSA) in Kazakhstan. The company hoped to buy into BG's share of the PSA, but partners Eni, Royal Dutch/Shell, Total, and ExxonMobil pre-empted the sale.

Cnooc reportedly viewed the decision to keep it out of the Caspian as strictly business. Upon receiving the news that the bid was rejected in mid May, Cnooc shrugged off the lost opportunity and began looking for other possibilities.

With money in hand, Cnooc could consider a stake in Russia's Sakhalin gas project. Investment on that front would help to secure its output growth past 2007.

China evidently recognizes the value of developing a strong relationship with its northern neighbor, despite their adversarial history.

In the wake of the war in Iraq, China has voiced endorsement of a multipolar world. In other words, China is uncomfortable with a US-dominated world order. So as China looks outside the Middle East for energy reserves in the post-war world, the likely nearby source is Russia.

New Chinese leader Hu Jintao recently made his first official trip outside China, meeting with Russian President Vladimir Putin, with whom he endorsed cooperation efforts between China and Russia in a number of disciplines, including energy. Putin recently gave the go-ahead for a huge new onshore oil pipeline to China, choosing China over Japan as a destination for Russian oil.

Russia's Yukos, which has pushed the pipeline project forward, plans to export 400,000 b/d through the pipeline in 2005, eventually increasing throughput to 600,000 b/d.

The successful construction of the oil pipeline will provide a firm foundation upon which to build future cooperation – and very likely, future energy projects as well.

The development plan

While Cnooc looks outside its borders for reserves, the company has not lost sight of its own considerable resources.

Cnooc's exploration and development capex in 2003 is estimated at $1.4-$1.55 billion. PSC partners are expected to invest an additional $150-250 million in exploration offshore China.

A Cnooc corporate statement says the company expects to have 12 development projects under active construction this year.

The first major step in that direction came with the announcement on Dec. 31, 2002, that the largest offshore oilfield, Penglai 19-3, began to pump oil. Penglai 19-3 holds an estimated 2.6 Bbbl of oil in place.

Cnooc is also expected to start gas production at Dongfang 1-1 in September 2003. The 99.7 bcm field is 100 km south of the Hainan islands in the south of China. Initial production is estimated at 2.4 bcm/yr.

Exploration successes and plans

Late in September 2002, Cnooc solicited foreign bids for oil and gas exploration and development of 12 new deepwater blocks in the South China Sea.

While bringing in foreign investors, Cnooc is reportedly planning considerable investment of its own, including more than 600 wells to be drilled in Bohai Bay alone this year.

Last December, Cnooc announced the success of appraisal well XJ23-1-4 in the Pearl River Mouth basin of the Eastern South China Sea. According to company executives, the well results show the Pearl River Mouth basin continues to offer new hydrocarbon prospects. More exploration drilling can be expected in the area.

In February of this year, Cnooc announced a successful wildcat in the Bohai Bay with the BZ 34-1S-1 well. Nearby BZ 34-4-4 and BZ 34-6W-1 on nearby structures also found oil.

Exploration has been successful. And expanding offshore infrastructure will make developing discoveries offshore China increasingly economically advantageous as time goes on.

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