China Energy Watch: Oil Strike Spurs New Exploration Hopes

BEIJING May 09, 2007 (Dow Jones Newswires)

PetroChina Co.'s (PTR) confirmation of huge oil reserves near Tianjin may revitalize exploration in the shallow northeastern waters that lap the Chinese mainland, and tempt back major oil companies scared away by a string of dry wells more than a decade ago.

But analysts warned the estimated 7.33 billion barrels of oil equivalent found at the Nanpu block of the Jidong field may also harden attitudes in China's government against foreign oil companies being given access to new acreage.

The discovery is China's biggest for more than 30 years and it led to PetroChina's shares shooting up 14% on the Hong Kong stock exchange on Friday as investment banks urged clients to buy aggressively.

Prior to that, exploration prospects in China's shallow waters risked being eclipsed by the potential of deepwater areas like the South China Sea where in 2006 Canada's Husky Energy Inc. (HSE.T) found world-class recoverable reserves of natural gas estimated at up to 170 billion cubic meters.

Victor Shum, a Singapore-based oil analyst at consultancy Purvin & Gertz Inc., said the Nanpu discovery "reminds everybody that there are still opportunities in (China's) shallow waters."

Foreign companies poured billions of dollars into exploring China's shallow waters in the 1980s and 1990s in the hope that the region would become an oil producing hub to rival the Gulf of Mexico or the UK's North Sea.

U.S. oil major ConocoPhillips (COP) was the most successful, discovering the Peng Lai field in Bohai Bay in May 1999. Analysts expect the field to produce more than 800 million barrels of crude oil as it ramps up operations from next year.

But others didn't fare so well and many companies used the oil price slump in the late 1990s as an excuse to scale back their investments in offshore oil exploration in China or exit altogether.

ExxonMobil Corp. (XOM), which took part in the first offshore tender round in China, currently has no upstream oil assets in the country. Total S.A. (TOT) and Royal Dutch Shell Plc (RDSB.LN) are focused on producing natural gas from the onshore Ordos Basin, while BP Plc's (BP.LN) only upstream interest in China is a non-operating stake in the Yacheng-13 gas field in the South China Sea, supplying gas to Hong Kong.

Even smaller players were signaling that they are no longer interested just days before confirmation of PetroChina's find. Newfield Exploration Co. (NFX) and Ultra Petroleum Corp. (UPL) have decided to test the market for their Bohai Bay assets, a senior Newfield executive told Dow Jones Newswires earlier this month.

Best Acreage Reserved For Chinese Companies

PetroChina said the Nanpu block, which is partly onshore and partly under the sea, holds proven reserves of 405.07 million tons of crude oil and 140.1 billion cubic meters of natural gas.

On the basis of total reserves of more than 1 billion tons of oil equivalent, analysts said the find could exceed the entire reserves of China's dominant offshore producer Cnooc Ltd. (CEO), although this depends how reserves are defined and classified.

Gordon Kwan, director of China oil and gas research at CLSA, said the prospects for shallow waters exploration were brighter now than before as high oil prices were encouraging oil companies to drill many new wells.

Marginal fields that were uneconomic at low oil prices are now being developed, particularly in China where domestic output has been stagnating and crude imports have been rising to meet the needs of an economy growing in the double-digits each year.

The Jidong oil field, covering an area of more than 1,500 square kilometers, has been on the radar of foreign oil companies for a number of years, but few had recognized its reserves could be so big.

Kerr McGee Corp., which was bought by Anadarko Petroleum Corp. (APC) last year, has explored in Jidong's Getuo and Laopu blocks. Agip SpA, a unit of Italian energy giant Eni SpA (E), has also searched for oil in Jidong.

On its Web site, Eni states that it scaled back its financial and operating commitment to oil exploration in China after drilling efforts in the Bohai Bay, along with the East China Sea and the onshore Tarim Basin in the northwestern region of Xinjiang, proved disappointing.

Shum, of Purvin & Gertz, drew parallels between PetroChina's Nanpu find and discovery by Cairn Energy Plc (CNE.LN) of reserves of between 450 million barrels and 1.1 billion barrels of oil-in-place in the eastern India state of Rajasthan in 2004.

Cairn, a minnow that was catapulted into the ranks of the UK's 100 biggest companies on the back of the India find, had bought the remaining 50% stake in the Rajasthan field for $7.25 million in 2002 from Shell.

Its find was the largest in India in 22 years and led to fierce competition for new acreage in new bid rounds. A recent press report said Chevron was among the international oil majors likely to bid for the 70 to 100 blocks due to be offered by the Indian government this year.

But foreign oil executives licking their lips at the prospects of taking part in a major new exploration effort for crude in China's shallow waters were likely to be disappointed as the best prospects were increasingly being reserved for PetroChina, Cnooc, or Sinopec.

"The government won't give away any sweet spots (to foreign oil companies) where they think there's a chance of finding oil," said Kwan.

Also, despite the attractions of exploring in a country which is more stable politically than oil-rich nations like Nigeria or Venezuela, foreign firms in China face the risk of ad hoc policy moves and a market where energy prices are below international norms.

The uncertain policy environment was exemplified by China's introduction of a windfall tax on oil sales last year, which drew complaints from U.S. oil companies. ConocoPhillips is seeking arbitration with Cnooc over costs incurred due to the levy.

China's encouragement to overseas oil firms to join the oil search in the 1980s and 1990s was driven initially by a lack of funds and an inability of domestic companies to do exploration and production work by themselves.

Now foreign firms were only welcome if they brought propriety technology, could extract oil from fields with complicated geology, or were able to drill in deep water, Kwan said.

This was underlined last year when PetroChina organized a rare international tender for oil drilling rights in the Tarim Basin in Xinjiang.

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