CNOOC in Talks to Enter $5B Uganda Oil Project

LONDON (Dow Jones), Oct. 1, 2009

China state-owned CNOOC Ltd. has become the latest company to enter talks with Uganda over a large Tullow Oil PLC-led project, people familiar with the matter said this week.

CNOOC company representatives approached the Ugandan presidency in early September and held talks with officials at the state house, said an official in Uganda President Yoweri Museveni's office.

The news follows confirmation by Nigerian government officials that CNOOC had sought to enter Nigerian oil blocks underused by major international oil companies. CNOOC's interest in Tullow's Ugandan project shows China is also interested in expanding on the continent through partnerships with emerging African oil producers.

CNOOC is one of several companies expected to hold future talks with U.K. independent Tullow over its Uganda project, another person said. Spokespeople for CNOOC, Tullow and the Ugandan Energy Ministry declined to comment on CNOOC's interest.

Tullow has made large discoveries in blocks located in Eastern Uganda's Lake Albert region and has said it wants to "farm down" -- or sell a stake to finance the project -- to other partners. In an e-mail Tuesday to Dow Jones Newswires, Tullow's Uganda country manager Brian Glover said the company has kicked off the farm down process, starting by engaging in talks with Uganda's government.

"We don't want to confirm a short-list at this stage since we are at a sensitive point in the process, and will be engaging with government before approaching suitable partners," Glover said.

Glover wouldn't comment on the details of the ongoing talks with government, but a government official familiar with the situation said the government had insisted on a number of conditions, including allowing only investors with a good oil production track record to partner with Tullow Oil.

Commercial production will require a 1,300 kilometer export pipeline to the Kenyan port of Mombasa, and the government would also like the operators to build a local refinery. The pipeline and refinery, plus a share of the oil block costs, could represent an investment of $5 billion to $6 billion, industry experts said.

Apart from CNOOC, China National Petroleum Corp. and China PetroChemical Corp., also known as Sinopec, have been preselected for talks to enter the project, industry sources said. It's unclear whether the Chinese concerns will team up or compete.

China is facing opposition in other African countries over some oil acquisitions and criticism over its decision to bring its own labor and technical problems in its projects. An Ugandan official said the government isn't necessarily against Chinese companies but would make a comprehensive assessment before approving any venture.

Chinese companies will also face stiff competition from oil majors.

CNOOC's trip came on the heels of a visit in August by Eni SpA's Chief Executive Paolo Scaroni. Having ruled out an outright acquisition of Tullow, Eni is interested in buying stakes in its Ugandan oil blocks and teaming up to build the proposed pipeline and refinery, people familiar with the matter previously said.

Tullow would like to obtain more information on its Uganda reserves potential -- including through further drilling -- before it sells a stake to a partner, the person familiar with CNOOC's interest said.

Tullow confirmed in early September it had made the largest oil discovery yet in Uganda, an area where it already has found more than 700 million barrels of oil equivalent.  

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