Oil and Gas in the Capitals

 Vol. 233 No. 7

Mention China and energy exploration these days, and the potential for a skirmish in the southern South China Sea comes to mind. But as World Oil reported in March, China hasn’t come close to making major energy moves in this highly contentious region. So what’s China up to regarding E&P? We took a snapshot of the very recent activities of China’s big four energy companies and found seven strategic trends.

CNOOC. In February, CNOOC, along with Total, bought Tullow’s three blocks in Uganda.1 Oil production there will begin in 2013, but at a mere 5,000 bpd. CNOOC appears to be eager to secure a wedge in Uganda to infiltrate East Africa, which Tullow believes has North Sea-type potential—the border between Uganda and Congo, alone, has a billion bbl of proven oil reserves.2

In early April, CNOOC announced a PSC with Eni China to exploit South China Sea deepwater Block 30/27. It’s in the Pearl River Mouth basin, 500 km southeast of Hong Kong.3 Later in April, CNOOC discovered gas in the Dongfang 13-2 field in the Yinggehai basin of the western South China Sea. Testing indicates an average rate of 42.4 MMcfgd.4 In May, CNOOC found oil at Luda 21-2 in Liaodong Bay in Bohai. It initially tested at 608 bpd.5

Sinopec: In December 2011, Sinopec spent $2.2 billion buying Canadian-based Daylight Energy, which specializes in exploiting the Deep basin of Alberta and northeastern British Columbia.6 Shortly thereafter in February, Sinopec joined Devon Energy in a $2.5-billion, one-third interest in five U.S. shale fields, in places such as Michigan and Ohio.7 Sinopec continued its buying spree into March, acquiring 30% of Petrogal Brasil, a Brazilian subsidiary of Portugal’s Galp Energia, for $4.8 billion.8

Also that month, as if to publically confirm the recent trend, Sinopec announced it was expanding its E&P activities by 78.9 billion yuan in 2012, up 19.5 billion yuan from 2011. Sinopec’s main focus is going to be five domestic fields, with others to follow.9

CNPC: Shell in March signed a PSC with CNPC to conduct shale gas E&P in China. Beijing aims to go from zero shale gas output in 2012 to a lofty 6.5 billion m3/year by 2015, and 100 billion m3/year by 2020.10

Shell and CNPC’s target area is the Fushun-Yongchuan Block in the Sichuan basin. China likes Shell, because it has effective fracing technology, and it has experienced good success with the Dutch giant. They appear to have a comfortable working relationship. Shell and CNPC discovered shale gas in Sichuan province in December 2011, and in February 2012, Shell sold 20% of a Canadian shale project to CNPC.11

China hasn’t allowed foreign companies or JVs to bid on domestic shale plays just yet—this according to a May statement by Mr. Li Yuxi, an oil and gas official with the Ministry of Land and Resources.12 But partnering with foreigners, such as Shell, after domestic companies have secured their blocks, seems permissible.13

In Sudan, CNPC is in a difficult position. Four years ago, it owned about 40% of Sudan’s E&P projects, but in July 2011, when Southern Sudan seceded from the rest of the country, CNPC lost immediate access to about half of these assets. It now has E&P infrastructure on both sides of the border. Making matters worse, in January 2012, Southern Sudan shut down all of its production, claiming Sudan was stealing its oil. This caused CNPC to lose 260,000 bopd. China has committed diplomatic personnel to both sides of the border to assuage the situation, but this is an uphill battle.14

PetroChina. Best known internationally for refineries and pipelines, PetroChina is buying overseas E&P assets to counter potential losses in its refinery portfolio.15 This is part of its “Peak Growth in Oil and Gas and Reserves” program, already several years old.16 In January, it paid $680 million for the entire MacKay River oil sands project near Fort McMurray, Canada.17 And it’s discussing with Shell a potential shale project in Xinjiang province’s Santanghu basin.18 Domestically, PetroChina has recently applied technology to increase production at older, existing fields, such as Daqing. Internationally, it’s moving to capitalize on recently bought E&P parcels (and downstream assets) in Australia, Africa, Canada and the Middle East, specifically Qatar and Iraq.19

Conclusion. Based on this snapshot of recent activity, combined with existing background information, seven major Chinese E&P trends emerge. First, China is wedging into East Africa, no matter how small the find, seemingly to establish a position to exploit the next big potential discovery in that region. Second, deepwater exploration continues off China’s immediate home waters, with assistance from international companies as a means to geographically pick low-hanging fruit, and to help push forward China’s young, ambitious deepwater program.

Third, Chinese domestic E&P continues to be one of Beijing’s top growing energy sectors and will be for the foreseeable future. Fourth, internationally, China is exploring more in Africa and especially the Americas, including Brazil, the U.S. and Canada. As an aside, China appears to be enamored with Canada’s E&P capabilities. Fifth, China has launched into international shale plays, mostly in the Americas, not only to harvest hydrocarbons, but also to acquire technology to use back home in a market somewhat isolated from foreign involvement. Sixth, Shell appears to be China’s foreign energy darling at the moment. And seventh, China’s involvement in Sudan signifies that Beijing is not shying away from conflict zones where it has oil and gas interests. 

LITERATURE CITED

1“Tullow makes Kenya’s first oil discovery,” Dow Jones News Wires, March 26, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=116355.
2 “Eastern El Dorado?,” The Economist, April 7, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=116713.
3 “Eni, CNOOC ink new South China Sea E&P pact,” CNOOC Ltd. Press Release, April 11, 2012, and “China: CNOOC announces first batch of South China Sea blocks available for foreign cooperation in 2011,” Energypedia.com, May 26, 2011, http://www.energy-pedia.com/news/china/cnooc-announces-first-batch-of-south-china-sea-blocks-available-for-foreign-cooperation-in-2011.
4 “CNOOC makes HP/HT discovery at Yinggehai,” CNOOC Ltd.
Press Release, April 20, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=117135.
5 “CNOOC finds oil at Luda - Analyst Blog,” Nasadaq, May 29, 2012, http://community.nasdaq.com/News/2012-05/cnooc-finds-oil-at-luda-analyst-blog.aspx?storyid=144659.
6 “PetroChina supervisors soak up Alberta refinery know-how,” Edmonton Journal, May 31, 2012, and Sinopec Daylight Energy website: http://www.sinopecdaylight.com/index.php?page=about_us.
7 “Devon CEO: No interest in acquisitions, despite abundant cash,” Dow Jones Newswires, April 4, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=116655, and “Sinopec Enters U.S. Shale,” Wall Street Journal, Jan. 4, 2012.
8 “Latin American oil draws new investors,” UPI Energy, April 3, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=116652.
9 “Sinopec to beef up upstream investment in 2012,” Xinhua, March 25, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=116369.
10 “Shell, CNPC sign China's first-ever shale gas PSC,” Dow Jones News Wires, March 21, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=116246.
1  “Shell, CNPC Sign China's first-ever shale gas PSC,” Dow Jones News Wires, March 21, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=116246.
12 “Investors show enthusiasm to China's shale gas business, Xinhua Economic News Service, May 24, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=118145.
13 “Shell, CNPC Sign China's first-ever shale gas PSC,” Dow Jones News Wires, March 21, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=116246.
14 “China’s awkward position: on both sides of the Sudanese civil war,” MaCleans.ca, May 16, 2012, and “Sudanese gov’t preparing new offensive, bishop says,” CNS News, July 7, 2008.
15 “Bharat Petroleum beating refiners on Africa exploration,” Bloomberg, May 17, 2012.
16 PetroChina 1st Quarterly Report, 2012, p 6: http://www.petrochina.com.cn/Resource/pdf/xwygg/2012yjdbg-e.pdf.
17 “PetroChina supervisors soak up Alberta refinery know-how,” Edmonton Journal, May 31, 2012.
18 “PetroChina In talks with Shell, Hess about shale oil joint venture,” Dow Jones News Wires, April 5, 2012, URL:http://www.rigzone.com/news/article.asp?a_id=116685
19 “Chinese firm surpasses Exxon in oil production,” San Angelo Standard-Times, March 30, 2012, URL: http://www.rigzone.com/news/article.asp?a_id=116521.