Devon Sets Out to Follow Husky Gas Discovery

BEIJING Aug 18, 2006 (Dow Jones Newswires)

Devon Energy Corp. (DVN) will within weeks begin collecting data on a block in the South China Sea next to where rival Husky Energy Inc. (HSE.T) reported one of the largest offshore gas fields ever found in Chinese waters.

Devon is preparing a team to carry out a 3-D seismic survey in the deepwater 42/05 block that the U.S.-based company acquired at the end of last year, said Earl Reynolds, vice-president and general manager of its international division.

"We're pretty upbeat about it. We think the prospects of the block are excellent," Reynolds told Dow Jones Newswires in a telephone interview.

This view was reinforced in June when Canadian firm Husky Energy announced the discovery of a field about 240 kilometers south of Hong Kong containing an estimated 113 billion to 170 billion cubic meters of recoverable natural-gas reserves.

CNOOC Ltd. (CEO), which is the listed arm of China National Offshore Oil Corp. and has an option to buy a 51% stake in the Husky field, currently has 164 billion cubic meters of booked natural-gas reserves.

The Husky discovery has re-ignited interest in exploring offshore China after a number of shallow wells turned up dry years ago, leading many multinational firms to focus their exploration efforts elsewhere.

China hopes that resources hidden beneath the seabed in its territorial waters will reduce its dependence on foreign energy supplies if they can be successfully and commercially brought to the surface.

Devon has a production sharing contract with CNOOC on 42/05 and the Chinese oil titan has the option to take a 51% stake if there is a commercial discovery.

Reynolds said his company has had a long-term relationship with CNOOC and remained interested in further opportunities offshore China, although he did not comment on specific fields that are said to be up for sale.

Last month, Dow Jones Newswires reported that U.S. firm Anadarko Petroleum Corp. (APC) had supplied credit rating agencies with a list of preliminary divestiture candidates following its $23.3-billion double acquisition of Kerr-McGee Corp. and Western Gas Resources Inc. (WGR). Analysts think the Kerr-McGee assets in China's Bohai Bay could be sold.

Growing Gas Market Fuels Commercial Hopes

On Devon's current prospects, Reynolds said that 42/05 has the potential to yield gas and enable the company to enter the growing Chinese market for cleaner fuels than coal or crude oil.

"Our view is that the gas market has considerable upside and clearly when you look at the overall economic growth in China, it gives you a lot of comfort that you are going to have growth," he said.

"Obviously price is everything, but I think we've got some comfort with our contract that we'll have a market-based price that makes sense to us."

Drilling is expected to begin on the 42/05 block late next year or early in 2008, but Reynolds said a global shortage of rigs capable of being used in deep water could see the timing pushed back.

Water depths in the block range from 198 meters to more than 1,980 meters across an area spanning nearly 7,000 square kilometers.

"We've got a team that continues to survey the rig market and to be honest with you it's a real issue right now. It's a very tight market," he said.

Devon also has a 24.5% interest in the Panyu field in the South China Sea that gave it net production of 6 million barrels of oil last year, while its share of reserves there represented 1% of the company total.

In addition to the 42/05 block, Devon earlier this year acquired the 11/34 block in China's Yellow Sea, about 400 kilometers northeast of the economic hub of Shanghai.

A 2-D seismic survey of the 11/34 field is expected to take place this year and a couple of wells could be drilled toward the end of 2007, Reynolds said.

"It's really a kind of oil play. We believe that it's an under-explored basin...that's got some nice potential," he said, adding that because 11/34 was in shallow water, any finds could be commercialized faster than the 42/05 deepwater block.

Devon's international exploration activities are focused on China, off the coast of Brazil and in the Gulf of Guinea, while it has a 5.6% carrying interest in a producing field offshore Azerbaijan.

The company had looked at onshore blocks in China but was put off by the complex nature of exploring them and the need to invest in infrastructure such as pipelines if oil or gas was found, Reynolds said.

Despite the potential of coalbed methane in China, where the government is targeting production of 10 billion cubic meters by 2010, he said the company has no plans to try and replicate its success in developing the Barnett Shale reserves in North America elsewhere in the world.

"At the current stage, we believe that our best opportunity to add value to the company would be to stay offshore and we don't really see a coalbed methane opportunity in China or elsewhere at this point," Reynolds said, citing factors such as prices and infrastructure.

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