07-12-04

China will continue to rely on its offshore areas to meet domestic oil supply for the next five years, the International Energy Agency (IEA) says. However, due to lower than expected production levels and potential territorial disputes, China's oil giants are increasingly being forced to increase their focus overseas.

Mainland oil production will average 3.52 mm bpd in 2005, up only 1.7 % or 60,000 bpd from 3.46 mm bpd in 2004. Yet, of that increase, more than two-thirds is expected to come from offshore.

Even though there has been some growth in onshore production in the northwest region, the growth is still not as substantial as offshore is likely to be in the medium term or at least within the next five years, says the IEA's principal oil analyst, David Fyfe. And although parts of the north-western region are still relatively under-explored, drilling in remote onshore areas is becoming more challenging and reservoir depths tend to be deeper. In addition, it is no easy task transporting the crude over vast distances to markets in the east.
China is likely to add between 50,000 bpd to 100,000 bpd of oil production annually, but mostly coming from offshore fields, says Fyfe.

Dominant offshore oil producer, CNOOC's Huizhou field in the eastern South China Sea started producing 6,500 bpd of oil in November. Peak target production is estimated at 45,000 bpd. Its Bonan fields in the North China Sea also started producing 4,200 bpd and 1.4 mm cf of gas in October. Analysts say CNOOC will meet its 2004 production target of 140-145 mm boe after boosting production to 66.6 mm boe in the first half of this year. Boe covers all hydrocarbon products including gas.
Yet, according to IEA's Fyfe, China's offshore production is not as prolific as five years ago because the discoveries in recent years have lagged earlier expectations. This could partly be explained by higher production costs.

Merrill Lynch said in a recent report that CNOOC's production cost per barrel of oil in the first half of this year has increased to $ 4.46 (HK$ 34.79) from $ 3.20 a year ago. Although some offshore basins have had drilling and development success, the volumes are not high enough to offset onshore declines, according to analyses by Merrill Lynch and the IEA.
Nevertheless, the government realises offshore's importance for oil supply. Earlier, it rejected Vietnam's request to halt exploration in Beibu Bay, straddling its border with Vietnam.

China is also at loggerheads with Japan over exploration in the Xihu Trough in the East China Sea, just west of the line Japan claims as the boundary of its exclusive economic zone. The trough, 400 km east of Shanghai, contains large gas deposits.
PetroChina recently applied for a licence to explore oil and gas blocks offshore China. The company has not announced the specific areas it is looking at but market watchers say PetroChina could be eyeing areas in disputed territories such as the Spratly Islands. A Ministry of Land and Resources official said that as allpotential fields are mostly taken up by CNOOC by now, the bigger opportunities lie in disputed territories.

With limited opportunities domestically, Chinese oil giants are increasingly scouring the globe for oil and gas assets and paying a high price for it. It is increasingly difficult for Chinese oil companies to find good assets overseas as the good ones are already taken by western companies, says a source from China Petroleum Economics and Information Research Centre, a subsidiary of China National Petroleum Corp (CNPC).
So Chinese companies are increasingly going into less developed countries and offering infrastructure in order to secure oil and gas assets. For instance, CNPC, parent of listed PetroChina, has tapped reserves in less developed countries in exchange for investing in infrastructure projects like railways, oil pipelines, and even educational facilities. The company has even invested in countries with political risks like Sudan, Ecuador and Chad.

Analysts say that China's remaining onshore production may have to come from marginal oil wells in future. As most of these wells are owned by the listed companies, this means they will be developing these at a higher cost to keep shareholders happy.
Sinopec produced 135.85 mm barrels of crude oil in the first half of 2004, up only 1.59 % from a year ago levels. PetroChina produced 388.5 mm barrels in the first half of this year, an increase of just 0.54 % from a year ago. To that end, China Petrochemical Corp, is looking at a possible acquisition of Li Ka-shing controlled Husky Energy of Canada in order to gain quick access to existing oil and gas reserves.

Source: The Standard