11-09-03 Canadian oil and gas company Husky Energy is expected to drill the first deep water well in Chinese water, in the western South China Sea, by the end of this year, a top official with the China National Offshore Oil Corporation said.
CNOOC sees good hydrocarbon production prospects in that area of the South China Sea, and aims to double oil and gas output there in the next three years, from an annual 700 mm cm of oil and gas equivalent now, said Zhu Weilin, President of CNOOC's subsidiary.

Zhu also said CNOOC has sweetened its production-sharing terms to encourage more foreign investment in China's deep water oil and gas exploration in the South China Sea.
"CNOOC will share the risk in the exploration period, which is longer than in shallow water blocks," he said. "It (Husky) is looking for rigs now to drill the well. Drilling is expected to start late this year," he said.

Husky's well will be the first one drilled in China's deep water areas, which by definition means water deeper than 500 meters. Husky signed a $ 10 mm production-sharing contract with CNOOC last December to explore the 40/30 Block in the Pearl River Mouth Basin.
This was the first and only deal so far resulting from CNOOC's tender of 12 deep water blocks for international investment made in February 2002. The Block is about 100 km southeast of Hainan island, covering an area of 6,704 sq km, with water depth ranging from 600 meters to 1,500 meters.

The contract calls for three phases of exploration beginning with a 1,600- meter exploration well. The minimum spending on exploration is about $ 10 mm.
Zhu noted that for shallow water areas, foreign companies now take 100 % exploration risks in China, meaning that if they don't make commercially-exploitable finds, they lose their investment costs.
CNOOC avoids such risks by only getting involved when foreign companies make commercial discoveries. For new deep water prospecting, CNOOC will provide up to 30 % of exploration costs, he said.

Zhu said CNOOC isnow negotiating with several foreign companies on other deep water blocks delineated in February 2002. He said foreign companies are likely to form consortia for joint oil and gas exploration and production in these areas, in order to reduce their exposure. CNOOC will also increase seismic surveying in the deep water areas, he said.
"We will conduct three-dimensional surveys and get to know the (oil and gas) structures better," he said.

Also, CNOOC will start developing some of the marginal blocks discovered over the last few years in the South China Sea. These efforts were expected to raise its oil and gas production in the area by 60 % or 100 % over the next three years, he said.
"We had shelved the development of these marginal discoveries in the past due to cost concerns," he said. Now CNOOC is going to rework the development scheme by grouping these discoveries together and using common exploration and production facilities to make the development feasible, he said.