China's Domestic Exploration Costs Surge - Woodmac

BEIJING, Jul 26, 2007 (Dow Jones Commodities News)

Despite concerns about intensifying competition between China and the West for energy resources, China's listed oil trio increased their spending on domestic exploration and production from 2004 to 2006 by more than their total international expenditure last year.

According to a report by UK-based oil & gas consultancy Wood Mackenzie, PetroChina Co. (PTR), Cnooc Ltd. (CEO) and China Petroleum & Chemical Corp. (SNP), known as Sinopec, boosted their upstream investment within China to $21.5 billion in 2006 from $12.6 billion in 2004.

Although their spending appears to be paying off, with discoveries such as the Nanpu oil and natural gas strike by PetroChina in Bohai Bay, Norman Valentine, senior corporate analyst at Wood Mackenzie, said China is unlikely to raise overall domestic oil supply substantially.

Many of China's oil fields are showing signs of age, with crude output at PetroChina's flagship Daqing field, which has been in production since 1963, falling 3.5% last year after declining 3% in 2005.

Valentine said the most dramatic impact of the recent finds was likely to be on China's plans for natural gas, with the companies becoming more selective about pursuing some more speculative projects for piped natural gas or foreign liquefied natural gas.

The report said that PetroChina's investment rate for domestic upstream developments was almost $9.40 per barrel of oil equivalent , which was substantially higher than the average rate of the international majors at $7.50 per barrel of oil equivalent.

"Sinopec's and Cnooc's domestic investment rates of around $12 per barrel of oil equivalent were also greater than the average rate of the international large caps, at $11 per barrel of oil equivalent," Valentine said.

"In terms of activity, the differences are probably greater, as China has to some extent been sheltered from the full impact of the recent inflationary environment affecting upstream capital costs due to the lower costs of domestically sourced labor and materials," he said.

PetroChina said in May that it had discovered 7.33 billion barrels of oil equivalent in the Nanpu block in Bohai Bay's Jidong oil field, which some analysts said could be the largest oil discovery in the world since the giant Kashagan field was found in the Caspian Sea in 2000.

In addition to this find, higher domestic spending had helped to boost output from older fields, with PetroChina investing in enhanced oil recovery at Daqing and Sinopec halting production declines from the Shengli oil field.

"While the Chinese national oil companies will continue with their efforts to internationalize and diversify as they pursue their aims of becoming fully fledged international oil companies, recent results show the benefits of their continuing and increasing domestic investment," Valentine said.

"Some of the recent discoveries have been world-class and, taking into account the lower level of domestic costs and China's favorable fiscal regime, returns from domestic upstream investment are likely to compare favorably with what can be achieved through the exploitation of international opportunities," he added.

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