Lack of Drillships May Slow Husky's Gas E&P in South China

SINGAPORE Aug 24, 2007 (Dow Jones)

Husky Oil China Ltd.'s plan to drill a second deepwater gas exploration well in the South China Sea may be delayed due to a global shortage of deepwater drillships, an official from China National Offshore Oil Corp. said late Thursday.

CNOOC, which lacks the expertise to conduct deepwater exploration, signed a contract in August 2004 to allow Husky Oil China Ltd. to drill three deepwater exploration wells in block 29/26 before 2011.

In June 2006, Husky made a significant natural gas discovery at Liwan 3-1-1 exploration well, which was drilled to a depth of 1,500 meters in block 29/26 in the Pearl River Mouth Basin.

Husky said the discovery could contain potential recoverable natural gas reserves of 4 trillion to 6 trillion cubic feet, making it one of the largest natural gas discoveries offshore China.

However, Husky hasn't started drilling a second well partly because Chinese drillships can only operate at shallower depths, and there is a global shortage of deepwater drillships, the CNOOC official familiar with offshore exploration said on condition of anonymity.

"In the world, there are only slightly more than 10 deepwater drillships that can operate at such a depth, and most of them are drilling in the Gulf of Mexico or West Africa."

There are few deepwater drillships globally because of its prohibitive $5-billion price tag, the official said, adding that daily rental typically runs into millions of dollars.

Under the contract with CNOOC, the third largest oil and natural gas producer in China by assets, Husky will fund 100% of the exploration costs, but CNOOC retains the right to take as much as a 51% stake in any oil or gas discovery.

Husky Oil China Ltd.'s Canada-based parent company Husky Energy Inc. (HSE.T). didn't immediately reply to an e-mail inquiry on the timetable for the second deepwater well.

Husky Oil China Ltd. has exploration rights to seven oil and gas blocks offshore China spanning 7.6 million acres, according to Husky Energy's Web site.

CNOOC doesn't conduct deepwater exploration due to its lack of expertise, and has only drilled to a maximum depth of around 500 meters, the official said.

"But it's just a matter of time before CNOOC starts deepwater exploration on its own," the official said without providing a timeframe.

Copyright (c) 2007 Dow Jones & Company, Inc.

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