CNOOC in Talks with Nigeria Over Offshore Oil Blocks Deal

BEIJING Aug 07, 2006 (Dow Jones Commodities News via Comtex)

China National Offshore Oil Corp. is in talks to secure right of first refusal on oil blocks to be offered in an international tender by Nigeria - the latest step in its scramble for African assets.

Edmund Daukoru, Nigeria's oil minister, told Dow Jones Newswires that the blocks were set to be made available to China's largest offshore oil producer by output in return for an investment package financed by a $2.5 billion loan.

An agreement could see CNOOC granted "lifting rights" on commercial terms from fields in Nigeria for the first time, he said. This would enable CNOOC to ship crude oil back to China to feed the nation's fast-growing economy.

China is the world's second-largest consumer of oil and has been ramping up efforts to diversify its sources of crude away from the instability-prone Middle East, with Premier Wen Jiabao leading the latest in a string of high-profile delegations to oil-rich African nations in June.

"They (CNOOC) would have preferred to negotiate directly, but we would like the value to come out not by negotiation but through a market competitive process," Daukoru said during a three-day visit to China.

This process involves holding a tender to establish the market value of the blocks rather than an outright discretionary allocation, he said. CNOOC would then have right of first refusal to match the top bid.

But Daukoru, who is also president of the Organization of Petroleum Exporting Countries, did not reveal the location or the number of blocks being considered as part of the deal.

Negotiations followed the signing of a memorandum of understanding earlier this year on expanding economic cooperation between the two countries and a final deal should be signed when Nigerian President Olusegun Obasanjo visits China in November, Daukoru said.

In March, CNOOC bought a 35% working interest in a license to explore for oil offshore Nigeria for $60 million, and Chairman Fu Chengyu named Nigeria alongside Myanmar as the two countries where his company wanted to focus its investment in the medium term.

Two months earlier, CNOOC agreed to pay $2.27 billion, plus $424 million in expenses, to South Atlantic Petroleum Ltd for a 45% working interest in the OML 130 offshore oil mining license, which mainly covers Nigeria's undeveloped Akpo field.

Its activity has been mirrored by state-owned rivals China National Petroleum Corp., the parent company of PetroChina Co. (PTR) and China Petrochemical Corp., or Sinopec Group, which have also been snapping up upstream assets in Africa.

"CNOOC is very aggressive. I'm very impressed by that," said Daukoru.

"They are very committed to the kind of undertaking which we are trying to get out of them and in return for which will be oil blocks (and) perhaps crude oil lifting rights on commercial terms."

A $2.5 billion loan has been offered by the Export and Import Bank of China and CNOOC would be expected to cover a large chunk of the interest rate on repayments in return for a deal, Daukoru said.

He added: "By November everything can be agreed and we can sign off on the blocks and the loan is ready for draw down hopefully."

A spokesman for CNOOC could not be reached for comment.

Daukoru's whistlestop visit to China included a tour of a fertilizer plant on the southern island of Hainan as Nigeria is known to need more fertilizer for its agriculture sector, which is the mainstay of local communities.

Although details have not been finalized, Daukoru said a "judicious mix" of projects including building fertilizer plants and investment in refineries would be financed by the overall loan put up by the Chinese.

Nigeria has suffered sporadic outbreaks of violence against oil infrastructure such as pipelines as communities express anger at the perceived plundering of national oil wealth by overseas firms and the lack of benefits flowing back to the grassroots.

Around 600,000 barrels per day of Nigerian crude oil output - or one-fifth of its total capacity - is currently shut in because of sabotage, Daukoru said.

Chinese firms have been keen to cut deals that involve investment in infrastructure projects if it means they overtake overseas rivals in acquiring African assets.

In May, CNPC - the largest oil producer in China by assets - secured four oil blocks in Nigeria in a deal that also saw it agree to invest $2 billion in the Kaduna refinery there.

Nigerian crude is a high-quality light, low sulfur grade referred to as sweet, and is highly prized by oil consuming nations because of its high gasoline content and relatively cheap processing costs.

(Renya Peng contributed to this story)

Copyright (c) 2006 Dow Jones & Company, Inc.