CNOOC Goes Solo in Deepwater Exploration, Opens New Frontier for China

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China's first ever deepwater hydrocarbon discovery is significant not only for the domestic upstream industry, but also on countries in the region.

China finally realized its goal of finding petroleum reserves in deepwater acreage when state-owned China National Offshore Corp. (CNOOC) successfully drilled the Lingshui 17-2-1 exploration well at the Lingshui 17-2 gas field in the South China Sea, located 93 miles (150 kilometers) south of Hainan Island in the Qiongdongnan Basin.

The Lingshui gas find has generated excitement in China’s upstream hydrocarbon sector – particularly for CNOOC whose portfolio of domestic offshore oil and gas fields are relatively mature – as deepwater prospects could emerge as the next frontier for the company.

Even so, the optimism surrounding China’s first deepwater hydrocarbon discovery has been tempered by concerns that an extension of Chinese exploration to the disputed waters of the South China Sea could trigger political, diplomatic and potentially military complications with neighboring countries.

China Finds Success in Deepwater, Finally

CNOOC announced the Lingshui discovery in mid-September by Hai Yang Shi You 981 or HYSY 981 (UDW semisub). The rig – China’s first locally built deepwater semisub costing $975 million to construct – was at the center of a diplomatic spat between China and Vietnam in May when CNOOC conducted exploration drilling near Paracel Island, 120 nautical miles from Vietnam’s coast. Vietnam is contesting China’s sovereignty over the Paracel Island, which Beijing seized from South Vietnamese troops in 1974.

The Lingshui well broke new ground for China as this was the first time a local petroleum firm succeeded in drilling a deepwater exploration well – without foreign assistance – at depths of 4,921 feet (1,500 meters).

“This is CNOOC’s first deepwater success as an independent operator, but it is not the first deepwater project in China. CNOOC partnered Husky in the Liwan project which was operated by Husky during the exploration phase,” Felix Tan, an upstream analyst at consultancy group Wood Mackenzie, explained to Rigzone.

The Liwan gas project – which lies 186 miles (300 kilometers) southeast of Hong Kong in the South China Sea – is China’s first deepwater development. Gas production commenced from Liwan in March, seven years after discovery. CNOOC has a 51 percent stake in the project and operates the shallow water facilities, while Husky – holder of the remainder 49 percent interest – manages the deepwater segment of the development.

The Lingshui well flowed 56.5 million cubic feet per day (MMcf/d) of gas, equivalent to 9,400 barrels of liquids per day, Xie Yuhong, manager at CNOOC said, as quoted by China’s Xinhua news agency. Based on test results, the Lingshui field may contain large reserves of at least 1.06 trillion cubic feet (Tcf) or 30 billion cubic meters (Bcm), he said.

CNOOC is hopeful about the prospect for the Lingshui find as it indicates a huge exploration potential for the surrounding areas and could help unlock deepwater petroleum resources in the South China Sea, chairman Wang Yilin was quoted by Xinhua as saying.

Since the Lingshui gas discovery, China’s largest offshore petroleum producer has drilled two additional appraisal wells and has spud a third, Tan said in a Wood Mackenzie report last month.

With appraisal yet to be completed, it remains unclear now whether Lingshui holds sufficient gas resources for development. Still, the potential development of China’s first independently-operated deepwater petroleum project is exciting news for CNOOC given ageing domestic fields.

Should the project proceed to development, CNOOC is expected to leverage on experience gained from working with Husky in constructing the Liwan project. Deepwater infrastructure in the Liwan gas project included:

  • nine subsea wells
  • deepwater flowlines
  • control systems and manifolds

Domestic Implications of the Lingshui Discovery

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China’s Exploration Blocks on Offer

News of the Lingshui discovery coincided with the latest bidding round for offshore exploration blocks in China. CNOOC issued an invitation Sept. 11 for foreign companies to participate in the tender to bid for 33 offshore oil and gas exploration blocks, covering a total of 48,690 square miles.

Among the blocks on offer are five – 53/32, 53/36, 64/05, 64/03 and 64/26 – in the Qiongdongnan Basin, where the Lingshui field is located.

The Lingshui discovery may reverse flagging interest in deepwater blocks in China as foreign firms, including international oil companies (IOC), showed little interest in bidding for such acreages due to “high exploration and development costs,” The Diplomat said in a Sept. 16 report. Moreover, IOCs like Anadarko Petroleum Corp., BP plc and Chevron Corp. have encountered dismal results when drilling deepwater exploration blocks in China in recent years.

Husky believed that the deepwaters of the northern South China Sea have huge gas potential as only about 25 wells had been drilled so far, producing one major find – Liwan. This compared favorably with the situation in the deepwater region of the North Sea, where 180 wells were drilled before the first commercial discovery was made.

"It is [in the] early days for a huge area," Robert Hinkel, Husky’s chief operating officer told the South China Morning Post April 2.

More deepwater drilling is likely in the region, with more newbuild Chinese semisubs joining HYSY981 as CNOOC looks to build on its recent exploration success at Lingshui. CNOOC reportedly has three more semisubs under construction, including Hai Yang Shi You 982 (DW semisub), The Diplomat said, citing the Wall Street Journal.

The Lingshui discovery could also provide a boost to China’s oilfield services sector. CNOOC’s subsidiaries China Oilfield Services Ltd. (COSL) and China’s Offshore Oil Engineering Co. Ltd. (COOEC) should generate more revenue through the provision of offshore services as its parent firm moves further into deepwater activities.

“The Lingshui deepwater discovery will be positive for services companies such as COSL and COOEC in the offshore sector,” Tan commented to Rigzone.

COSL will benefit from CNOOC’s shift towards deepwater projects as it manages the HYSY981 semisub. Given that developing domestic deepwater capabilities is “strategically important for both CNOOC and China … CNOOC will therefore continue to support COSL … COSL is investing in new deepwater assets to further its capabilities to support CNOOC's deepwater projects,” Fitch Ratings said in a Sept. 23 report.

Like COSL, COOEC should benefit from CNOOC’s potential development of deepwater projects as the firm could provide its parent firm with engineering, construction and installation services.

Regional Issues that May Surface

Despite the optimism surrounding the Lingshui discovery in China, a major stumbling block to China’s deepwater ambition in the region is whether Chinese energy firms will proceed to drill in disputed areas of the South China Sea. After all, this is the region where China’s territorial claims are being challenged by the Southeast Asian states of Brunei, the Philippines, Malaysia and Vietnam.

Comments from China indicated that Beijing remains unconcerned about any political, diplomatic and perhaps military fallout with its Southeast Asian neighbors that arises from its search for energy resources in the disputed waters. 

The Lingshui find has in fact opened the door to deepwater petroleum resources in the South China Sea, CNOOC chairman Wang told Xinhua. Furthermore, the HYSY981 semisub – which found energy resources near the Paracel Island earlier this year – might be deployed again in the contested area, Dr. Kang Lin from China’s National Institute of South China Sea Studies told The Diplomat.

Collectively, these comments suggest that China’s newly acquired deepwater expertise is seen as a means to satisfy the country’s growing energy demand. The search for energy resources (even in the disputed South China Sea) is seen “purely as an economic issue. Very little to do with sovereignty as the Paracel Island have already been under effective Chinese control,” Dr. Li Ming Jiang, associate professional at S. Rajaratnam School of International Relations in the Nanyang Technological University in Singapore told Rigzone earlier.

Fueled by strong economic growth, Chinese energy demand has been rising continuously. Last year, oil consumption in the world’s second largest economy rose 4 percent to around 10.7 million barrels per day and China became the world’s largest oil importer in the fourth quarter, data from the United States Energy Information Administration (EIA) showed. Meanwhile, Chinese gas demand also increased to 5.2 trillion cubic feet in 2012, or 11 percent more than in 2011.

China’s interest in deepwater drilling represents a convergence of two of China’s major strategic interests, which, The Diplomat explained, is to protect its claims to much of the South China Sea and reduce Beijing’s growing dependence on imported energy.

How China’s newly acquired capability in deepwater drilling impacts on its relations with rival claimants in South China Sea remains to be seen. But it is worth noting that CNOOC said the Lingshui gas discovery produced the highest gas flow among the deepwater wells tested by HYSY981 yet, presumably including those drilled near the Paracel Island offshore Vietnam from May to July. So any deepwater activities by CNOOC are expected to be near Hainan Island rather than the Paracel Island.

Still, the Lingshui success only just a beginning in China’s quest to find and develop deepwater energy resources.

“CNOOC is climbing up its learning curve in deepwater and no doubts more needs to be done for it to achieve greater success,” Wood Mackenzie’s Tan said.



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