CNPC Woos Foreign Partners to Boost Oil Recovery

BEIJING Dec 20, 2007 (Dow Jones Newswires)

China National Petroleum Corp. aims to let more foreign companies develop domestic oil fields as it grapples with stagnant production, a senior executive said, building on the success of major onshore gas deals.

CNPC, China's largest oil company by assets and parent of PetroChina Co. (PTR), wants foreign firms to bridge the gap in its knowledge of enhanced oil recovery techniques, especially the injection of carbon dioxide into reservoirs to boost well pressure.

China's rising oil needs are also pushing CNPC to open more frontier areas such as the Tarim Basin in Xinjiang, where the terrain is harsh, and give foreign companies access to leases containing unconventional reserves such as oil shale and heavy oil.

CNPC's strategy is being formulated after production-sharing contracts with Total SA (TOT) and Royal Dutch Shell PLC (RDSB.LN) brought higher natural gas output at blocks in the Ordos Basin. On Tuesday, CNPC signed a 30-year contract with Chevron Corp. (CVX) to share output from a high-sulfur gas block in southwestern China's Sichuan province.

"We are thinking of oil after the gas deals...Our priority (for foreign partnerships) is to raise local oil recovery rates," Yan Cunzhang, general manager of the foreign cooperation unit under CNPC, told Dow Jones Newswires on the sidelines of the CNPC-Chevron signing ceremony.

China's crude oil production growth is failing to keep pace with rising domestic consumption. The International Energy Agency expects output to peak at 3.9 million barrels per day in 2012, even though this year's Nanpu Jidong oil field discovery is likely to come onstream at that time.

The IEA says all of China's 11 biggest oil fields bar Tahe in Xinjiang are past their production peak. The 11 fields, from 492 in production nationally, contribute nearly half of China's total domestic output.

Stagnating production is the engine of China's oil import dependency, which will likely break through the 50% threshold soon. State oil companies have responded by acquiring fields overseas and bringing equity oil back home, although experts aren't sure this is an effective strategy.

CNPC has a set a goal for its crude oil output in China and overseas next year of 108.65 million metric tons, equivalent to 2.18 million barrels per day, up 1% on year, an executive said earlier this week.

Oil Recovery Ambitions

Foreign companies have been pushing for a chance to work toward boosting oil recovery at China's aging oil fields such as the flagship Daqing field in northeastern Heilongjiang province, where output is declining at a rate of 3%-5% a year.

Yan said Norway's StatoilHydro ASA (STO) is exchanging technology with CNPC for the development of an oil field in Jilin province, also in the northeast.

Industry insiders say StatoilHydro is examining the possibility of using CO2 injection to raise output at the Fuyu oil field, which the Chinese started to develop in 1959.

According to CNPC, only 25% of the Fuyu field's reserves had been tapped by 2002, and this recovery rate could be increased to 35% or more if advanced technology is used.

In September, Hong Kong-based Enviro Energy International Holdings Ltd. (8182.HK) said it had bought a 50% stake in a PetroChina-owned block in Jilin and aims to use new technology to raise production there.

Peter Ho, senior executive vice president at Enviro Energy, said China lacks a systematic approach to enhanced oil recovery and incremental oil recovery, and domestic technology lags behind the U.S. and Canada.

"Although major technology transfer has been conducted through seminars, workshops, delegates' visits and so on, there are really no proper procedures in setting up viable pilot tests on a lot of EOR projects in China," Ho said.

China has used polymer and steam injection at fields in the northeast to boost oil recovery, but industry insiders say CO2 injection is more effective.

CO2 injection is also attractive to China due to the dominance of coal in the national energy mix and the large volumes of the greenhouse gas currently emitted by coal-fired power stations.

Although most oil and gas leases are held by PetroChina and Sinopec, some are in the hands of local operators that work with state companies in oil production.

Ho said foreign firms are well-positioned to step in as it becomes clear that the local independent companies lack the resources and capacity to conduct sophisticated oil operations in the long term.

This is already happening. In addition to Enviro Energy's contract in Jilin, CNPC recently signed a contract with Malaysia's Rimbunan Hijau Group to jointly develop a heavy oil block in the northeast.

Tarim Offer Still Open

Yan said CNPC remains keen to attract foreign investment to northwestern China - where 12 blocks covering one-fifth of the Tarim Basin were offered in an international tender this year - and into coalbed methane extraction.

"The blocks are still available and we are in talks with several companies," Yan said, declining to identify them.

Companies that showed an early interest in the blocks included Chevron, Shell and StatoilHydro, although none subsequently bid formally, according to industry people familiar with the situation.

CNPC is considering offering new, more attractive blocks in Tarim next year, said one industry person.

However, Yan said it is "too early to talk about new blocks" and the company will continue offering the existing 12 blocks.

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

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