CNOOC Targets Caspian Sea Assets, Shies from Russia

BEIJING Nov 27, 2007 (Dow Jones Newswires)

Offshore oil producer CNOOC Ltd. (CEO) wants to buy assets in the prolific oil producing region of the Caspian Sea but isn't interested in Russia because the risks are too high, a senior company official said Tuesday.

Yang Hua, chief financial officer, added the Caspian Sea to a list of target regions where CNOOC was looking to build its core business, putting it alongside Africa and the Asia-Pacific for the first time.

The Caspian Sea contains the Kashagan oil field, which was the world's largest oil discovery for 30 years when it was found, and the region is ringed by major oil producers including Kazakhstan, Iran and Azerbaijan.

Yang said CNOOC had chosen the three regions because of their resource base, financial and taxation policies and risk profile, including political, operational and environmental risks.

But a number of oil companies operating in the Caspian Sea area have found it a tough place to do business. The consortium developing Kashagan, which is led by Italian oil and gas company Eni SpA (E), is in a dispute with Kazakhstan over the buildup of costs and delays in the startup of production at the massive field.

International pressure is also building on Iran over its atomic energy program, stifling plans by Royal Dutch Shell (RDSB.LN) and France's Total S.A. (TOT) to develop gas reserves there.

"We do not fear risks, but need to ensure the risks are manageable," Yang told a small group of reporters.

"Although we look at Russia closely and with great interest, we won't go there because the risk there is beyond our management," he added.

Yang said CNOOC was still too small to compete in Russia, noting that foreign companies operating there such as BP PLC (BP) and Shell were many times its market value.

These companies have also clashed with the Kremlin over major projects, with Shell having to give up control of its Sakhalin-2 oil and gas project to OAO Gazprom (GAZP.RS) and BP's Russian joint venture TNK-BP Holding (TNBP.RS) giving the Russian state gas giant control over the Koyvkta gas field.

CNOOC's strategy is different from domestic rivals China Petrochemical Corp. and China National Petroleum Corp., both of which have invested in Russia's oil sector as they seek access to overseas reserves.

China Petrochemical Corp., known as Sinopec Group, bought Russian oil producer Udmurtneft (UDMN.RS) in partnership with Russia's state oil producer OAO Rosneft (ROSN.RS) last year, while CNPC has an exploration and production joint venture with Rosneft.

Although CNOOC doesn't have any assets in the Caspian Sea area at present, the company signed a memorandum of understanding with CNPC and Kazakhstan's state oil firm KazMunaiGaz in 2005 to explore and develop the Darkhan block in the northeast of the country.

Last year, China National Offshore Oil Corp., the parent of CNOOC Ltd., confirmed it wanted to invest in developing the Northern Pars natural gas field in Iran. Media reports put the proposed investment at $16 billion.

Despite a near two-year break since CNOOC's last deal - a $2.3 billion acquisition of a 45% interest in Nigeria's Akpo field - Yang said the company wouldn't act rashly, especially at a time of high oil prices.

"I'm not under any pressure to do a deal for the sake of it," said Yang, adding that value creation was key.

Yang was concerned at resource-rich nations tightening control over foreign investment through re-nationalization of projects and windfall taxes, but relying on domestic output of oil wasn't an option due to China's rising energy needs.

As a result, "today there is simply a shortage of opportunities", Yang said.

CNOOC continued to view offshore China, where it has made 10 discoveries so far this year, as its "most important playing ground", Yang added. He declined to say what the company was likely to spend on domestic oil exploration and production next year, saying its plans would be unveiled in January. Yang added that CNOOC was confident of hitting its production target of 162 million-170 million barrels of oil equivalent in 2007 in spite of the threat from typhoons in the South China Sea where it has a number of platforms.

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