CNOOC to shelve deepwater find development

Jun 06, 2016 12:00 AM

China National Offshore Oil Corp. (CNOOC) could postpone the development of its first independent deepwater gas discovery until after 2020 as a result of slower gas demand in its target markets.

"CNOOC is evaluating the economic viability of different plans, and it is likely the company will not start developing the field before 2020 due to current market conditions in coastal regions," a CNOOC source close to the project told Interfax Natural Gas Daily.

China’s main offshore energy explorer has yet to make a final decision on the overall development plan for Lingshui 17-2, the source added.

CNOOC said in February 2015 that Lingshui 17-2, which lies in the northern part of the South China Sea, had certified reserves of more than 100 billion cubic metres, making it one of China’s biggest offshore finds. The large reserves would help meet demand in southern China, Hong Kong and Macau.

State-owned CNOOC hailed its discovery in March 2014 as a "breakthrough" for independent deepwater exploration in the Qiongdongnan Basin – an area Shell and BG Group explored with no success.

Last year CNOOC shelved plans to develop Lingshui 17-2 using an FLNG project after the oil price rout forced the company to delay or revise the development of some recent major discoveries.

CNOOC’s Shenzhen branch is responsible for offshore development in the northern part of the South China Sea. The branch is shifting its operational focus from gas to oil because of the slump in gas demand growth, according to Deputy General Manager Mi Lijun.

The Shenzhen branch plans to cap annual oil and gas output at 15 million tons of oil equivalent for the 13th Five-Year Plan, down from 16.31 mtoe in 2015, said Mi at the Offshore China Convention in Shenzhen last week.

Production growth will resume in 2020, with output hitting 20 mtoe in 2030, said Mi. The Shenzhen unit had drilled 345 wells in 256 enclosed oil and gas areas by the end of 2015. Geological oil resources reached 1.17 billion tons, while gas resources were 263.3 bcm.

The proven rate of oil in the eastern Pearl River Delta Basin is 13% while gas is only 7%, which means future production growth is possible, according to Mi.

CNOOC’s Zhanjiang branch, responsible for the western and central zones of the South China Sea, will limit annual output to 10 mtoe until 2018 and then boost it to 18 mtoe by 2030, said Chief Geologist Yang Xibing. Gas will make up the majority of the new output.

The Zhanjiang branch plans to drill 38 wells in the central-south part of the South China Sea and discover 190 mtoe of proven reserves during the 13th Five-Year Plan. The branch has 30 exploration blocks in the northern South China Sea and 96 in the central-southern section, which combined amount to an area twice the size of Germany. The branch has 21 blocks under development covering 186,300 hectares.

The Zhanjiang branch had drilled 548 exploration wells up to the end of 2015; discovering 15 gas fields and 34 oil fields. It has sold 92 bcm of gas to date and has proven gas reserves of 570 bcm.

CNOOC’s two discoveries in the Qiongdongnan Basin.
CNOOC’s two discoveries in the Qiongdongnan Basin.


Financial friction

Chinese gas price cuts, spurred by soft demand for the fuel, have already caused friction between CNOOC and foreign partners. Canada’s Husky Energy has threatened to take legal action against CNOOC after the state oil giant failed to pay the full amount for take-or-pay contracted volumes from the Liwan 3-1 project.

The companies remain in discussions and no agreement has yet been made, a well-placed source told Interfax Natural Gas Daily on condition of anonymity.

"Of course CNOOC doesn’t want to go to court because that would hurt the partnership between the two companies, so it’s best both sides settle it calmly," said the source.

CNOOC will continue talks with Toronto Stock Exchange-listed Husky in a bid to "resolve the challenge", Chief Financial Officer Zhong Hua said in May, adding that the company always abides by its contractual obligations.

Canadian company Primeline Energy started arbitration proceedings against CNOOC last month over a non-payment dispute with Zhejiang Gas Development.

CNOOC and Primeline are 51/49 partners in the Lishui 36-1 project off the coast of Zhejiang province. CNOOC sells output from the field on behalf of Primeline and itself to Zhejiang Gas, but Primeline has underpaid a total of RMB 374 million ($57 million) for gas delivered since June 2015.

Primeline claims CNOOC has not done enough to enforce payments for offtake from Lishui 36-1 from Zhejiang Gas, with which it has filed a separate arbitration.

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