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Lloyds List: Husky gas find boosts Chinese activity

By: New enthusiasm from discovery in area previously given up as dry, writes Bruce McMichael, Lloyds List
Published: Sep 12, 2006

CHINA’S offshore exploration was given a huge boost by a deepwater gas discovery announced earlier this year by Canada’s Husky Energy.

The discovery in the South China Sea some 150 miles south of Hong Kong comes decades after this remote area was given up as devoid of hydrocarbons, so has stirred up new exploratory interest offshore China.

Fu Chengyu, chairman of Husky’s Chinese partner in the area China National Offshore Oil Corp, calls the gas discovery ‘a tremendous breakthrough for us.’ The find reportedly contains 3.5trn cu ft of gas, almost enough to fill one liquefied natural gas train.

If fully proven, the Liwan 3-1-1 discovery, one of the world’s largest discoveries this year, could raise Chinese gas resources by more than 7% to around 90 tcf.

‘This discovery confirms our confidence in the significant undiscovered hydrocarbon potential in the South China Sea,’ says Husky president and chief executive John Lau. The Calgary-based firm is controlled by Hong Kong billionaire Li Ka-shing.

This discovery is the country’s first from deepwater exploration, in which China is lagging far behind other Asian nations including Malaysia and Indonesia.

However, it will be many years before these remote resources will impact on long-term plans to increase imported energy resources such as LNG.

The partners in Liwan 3-1 recently signed three new production-sharing contracts to drill elsewhere for oil and gas in deepwater blocks in the eastern and western South China Sea.

Other explorers are also looking offshore with interest centred on the Bohai Bay in an area east of Tianjin, which is believed to hold more than 1.5bn barrels in reserves, and the Pearl River Mouth area.

At the same time, CNOOC is increasing its investments by 35% this year to raise hydrocarbon reserves and output. The group has raised its total capital spending to $3.1bn, of which $2.6bn will be on new offshore projects and $455m will be spent exploring.

Its oilfield development budget has grown $400m from last year’s $2.2bn and exploration spending will be 72% higher from a low level of $264m.

China’s largest offshore oil producer hopes to build its output 9% to 168m-170m barrels this year through new wells and projects.

CNOOC is thought to be looking to build a semi-submersible drilling rig to probe its deepwater prospects off the coast. It has formed a research team involving Shanghai’s Marine Design ‘ Research Institute to create the basic designs.

CNOOC may team up with Cosco Shipyard, which is looking to enter the rig newbuilding sector in a possible partnership with SembCorp Marine.

International oil companies, like Husky, are getting more involved in exploring off the Chinese coast as prospectivity close to the world’s fastest growing market improves.

Alongside China’s longer term partners such as BP and Shell, smaller independents including a joint venture led by Australia’s Roc Oil are exploring offshore. Preliminary appraisal results from a recent Roc Oil programme on the Wei 6-12S-1 oil discovery in block 22’12 in the Beibu Gulf were encouraging, but the field is complex.

Roc chief executive John Doran says: ‘Overall, this appraisal programme has provided encouraging results and no unpleasant surprises. The recognition of multiple oil reservoirs with substantial individual oil columns is a significant step forward.’

Roc’s drilling programme is a good example of how smaller companies can profit from operating in China by working with state oil companies.

A key reason behind China’s willingness to invite foreign oil companies is to keep domestic production flowing to meet demand in its rapidly growing eastern cities.

Now the world’s second largest oil consumer, China’s demand is consistently outpacing domestic supplies. Its own companies are looking closer to home, including deepwater opportunities, and buying up stakes in international oil fields in Africa, central Asia and South America.

China has entered energy supply negotiations with Russia and a number of central Asian countries including Turkmenistan and Kazakhstan. But analysts such as Wood Mackenzie’s Catriona Scott are sceptical that daily natural gas production promised will materialise in the medium term and whether it will be needed.

‘Security of supply is very important to China and the recent negotiations probably reflect China’s desire to ensure it has political influence and a sense of energy security with these countries,’ says Ms Scott.

Close to 85% of Chinese oil production is located onshore and in particular the prolific Daqing field in north-eastern China. Hydrocarbons have flowed for more than four decades at Daqing and production is now on a downward trend.

At the same time on the nation’s second-largest producing field, Liaohe in the north-east, China National Petroleum Corp has contracted several foreign firms to enhance oil recovery and extend the life of the field.

While CNOOC is the country’s leading offshore producer, CNPC operates onshore oil and gas fields in the northeast and northwest as well as a few shallow water blocks in northern Bohai Bay.

As a subsidiary of CNPC, PetroChina sources the bulk of its oil and gas production in northeastern, northern, northwestern and south-western China. It operates in the Songliao basin in the Heilongjiang and Jilin provinces and in Daqing, while natural gas production is centred in the Sichuan region.

CNPC is now focusing on producing in the northern Bohai Sea region, where it already has significant amounts of infrastructure.

Meanwhile, Sinopec is increasingly exploring in northwestern China, far from its usual sphere of influence, and has been linked with the potential Xihu Trough in the East China Sea.

Deepwaters off China have the potential to help the nation meet its domestic production targets, but will take years to reveal and exploit.

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