China Faces A Long Haul For Deep Water Gas, Oil

Dow Jones Commodities News Select via Comtex -- SINGAPORE, JUNE 1, 2005

Deep beneath the surface of the East China and South China seas could lie a vast treasure - something that China has been scouring the world for in recent years.

But its hopes of striking it rich by finding and then successfully exploiting major reserves of oil and gas under its deep offshore waters, and in so doing narrow its widening and costly energy deficit, are likely to remain unfulfilled for years to come.

The problem for China isn't so much locating potential deposits of hydrocarbons via seismic surveys. Rather, it is a lack of sophisticated drilling expertise to prove the existence of fields and to extract the deposits, and disputes over the ownership of this wealth.

A survey by China's major oil companies completed in 2003 put the country's offshore reserves at 24.6 billion metric tons of oil and 15.8 trillion cubic meters of gas, although it's not clear how much of this lies under deep waters.

China's deep offshore work has been limited so far, with planned or actual drilling in just three sites, and these are in joint ventures with North American companies.

It certainly needs to find new sources of oil and gas in a hurry, given the rate its oil import bill is mounting.

Faced with galloping consumption - China is now the world's second-largest oil consumer - domestic output just can't keep up, and its mature onshore oilfields in the northeast are peaking.

New finds in the shallow waters of China's Bohai Bay and onshore in Western China aren't making up the deficit.

A consequence has been soaring oil imports, which somewhat selfishly the world's number one oil consumer and rampant gas guzzler, the U.S., blames for this year's record crude oil prices.

China's oil imports have risen more than 27% a year over the past three years, and with prices soaring, the bill has climbed astronomically.

In April, China's imported a record 2.99 million b/d of crude, costing it some $150 million each and every day.

This is making China's energy planners' dream of finding vast oil and gas deposits even more alluring, but it could be a long path from dream to reality.

"The prospect of China's deep water exploration is limited due to a lack of opportunities caused by uncertainty in regional geopolitics," said Andrew Shuen, a China energy analyst with Hong Kong-based Platinum Broking.

"Geopolitics, oil economics and of course technology will all play a part in the prospect of these (drilling) activities," he noted.

Money And Technology

For China's oil industry, deep water usually means deeper than 300 meters, as opposed to the international standard of 500 meters.

China National Offshore Oil Corp., or CNOOC, enjoys exclusive rights for offshore production-sharing contracts with foreign companies.

The two other oil majors - China Petroleum and Chemical Corp. or Sinopec Corp.(SNP) and China National Petroleum Corp.- have to work with CNOOC if they want to enter offshore production-sharing contracts with foreign companies, though both of them have permits to explore and produce offshore.

So far, only three deep water projects are under way in China, all in the South China Sea. Two involve CNOOC and Canadian firm Husky Energy Inc.(HSE.T).

Husky is due to drill its second deep water well in Block 29/26 in December. Its first hole in Block 40/30 last July proved to be unsuccessful, but its depth of about 600 meters was a new record for both China and Husky.

The other deep water contract was signed in February by CNOOC and Kerr-McGee China Petroleum Ltd. a unit of U.S. firm Kerr-McGee Corp. (KMG). So far, the companies haven't announced any detailed exploration plans.

Offshore exploration is a costly business, particularly if the water is much deeper than that worked in by the drillers of the first such wells, in Venezuela's Lake Maracaibo in the 1920s.

A deep water well in the Gulf of Mexico now costs up to $100 million, while shallow water and onshore drilling can cost under $5 million and $500,000 per well respectively.

Accordingly, only cash-rich oil majors or deep-pocketed governments have the ability to go far under water. The most successful deep water areas so far are in the Gulf of Mexico, the North Sea and off West Africa.

In China, money doesn't seem to be a top concern.

"It's not difficult for those (Chinese) oil majors to borrow money, as the government always provides all kinds of help to them, including financial support," said Li Guohong, an energy analyst with China's Galaxy Securities Co. "The biggest challenge comes from technology," Li added.

China's oil majors have plenty of spending money. CNOOC Ltd, the listed arm of CNOOC, has more than CNY10 billion in cash and CNY8 billion 3-month short-term deposits, said Grace Liu, an analyst with China's Guotai Junan Securities.

Despite more than 20 years of offshore exploration, CNOOC is a beginner when it comes to deep water prospecting.

Take submarine line laying operations for example. The most advanced crane barge in China is CNOOC's Lanjiang.

It can operate to a maximum of 150 meters, barely dipping below the surface when compared to the most advanced crane barge in the world, which can work at depths of more than 2,000 meters.

Territorial Disputes

Most of China's potential deep water reserves lie in the South China Sea and the East China Sea. Unfortunately, both areas are bound up in complex, and sometimes heated, territorial disputes.

A highly-contentious area is around the Spratly Islands, where China, Taiwan, Vietnam, the Philippines, Malaysia and Brunei have competing claims.

Despite announcements on joint exploration, there is little prospect that oil or gas will emerge from that particular seabed anytime soon.

On March 14, China, Philippine and Vietnam said they would conduct joint seismic surveys of a 143,000-square-kilometer area in South China Sea over the next three years.

The agreement, though hailed as a "breakthrough" by Chinese media, doesn't mean an end to sovereignty clashes. Instead, it may pave the way for fresh disputes, especially if the survey shows signs of paydirt.

To the east, China faces strong resistance from Japan over who owns what.

This week, Chinese and Japanese officials met for two days on their feud over rights to gas from the Chunxiao gas field in the Xihu Trough.

The shallow-water field, under around 110 meters of water, lies largely in Chinese territorial waters on a continental shelf in the East China Sea, but Japan claims part of it overlaps its own claimed exclusive economic zone. CNOOC and Sinopec have erected drilling rigs there and have started work on a pipeline.

Not unexpectedly, they failed to agree on anything much than to hold more talks, and Beijing rejected Tokyo's request to suspend existing gas development work or provide details of this to Japan.

Last month, Japan's government, alarmed at the prospect of China's sub-sea wells extracting gas from what it believes is its side of the border, changed policy.

It ended a decades-long ban, and gave the go-head to Japanese oil companies to drill in the disputed areas, immediately incurring a strong protest from China.

Interestingly, last September Royal Dutch/Shell Group (RD) and Unocal Corp.(UCL) pulled out of the Xihu trough project, in which they had 20% shares, saying any reserves were smaller than expected and not commercially viable.

But some industry insiders suggest the politically-fraught project was something they had no wish to get caught up in. (C) 2005 FWN Select. All Rights Reserved

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