Stratfor:
Lost Opportunity for China's Oil Drillers
September 30, 2004
Summary
Unocal Corp. and Royal Dutch/Shell are pulling out of a joint project with Chinese state oil firms to exploit natural gas in the East China Sea. The withdrawal of the foreign partners will hurt China's ability to develop desired offshore drilling capabilities -- limiting its options for developing oil and gas resources and undermining its energy security.
Analysis
Unocal Corp. and Royal Dutch/Shell are withdrawing from a joint project with state-run China National Offshore Oil Corp. (CNOOC) and China Petrochemical Corp. to exploit oil and gas in the East China Sea. The two oil majors cited "commercial reasons" for pulling out of the Xihu Trough project, centered about 250 miles east of Shanghai.
The withdrawal of the foreign partners probably means the project -- should it proceed -- would produce too little gas to be profitable, which is bad enough for energy hungry China. Potentially much worse, though, is that CNOOC has lost an opportunity to work with experienced offshore drillers -- and to learn from them. China's long-term strategic plan includes the ability to unilaterally exploit offshore energy resources near and abroad, ability it does not now possess.
China hoped to produce 35 billion cubic feet of natural gas a year during the project's first phase. The gas would be piped to its booming central east coast to Zhejiang province and neighboring Shanghai, where there are severe energy shortages. However, the viability of the project is falling into doubt as the foreign partners, who each held 20 percent stakes in the venture, are dropping out.
Although the firms said they were pulling out for commercial reasons, two other factors may have influenced their decision. PetroChina, the largest oil company in China, announced Aug. 4 it had shelved a deal with Royal Dutch/Shell, ExxonMobil and Russia's Gazprom for the $5.2 billion West-East pipeline project. With the pipeline deal falling through and the limited access to China's lucrative retail gas market, Royal Dutch/Shell has probably re-evaluated its operations in China in general and has decided to move on.
The other factor is China's dispute with Japan over development rights in the East China Sea. The Xihu Trough is not in the disputed area, but is close to the disputed Chunxiao field, and Chunxiao gas might eventually share a pipeline with gas from the Xihu Trough. The foreign companies could view the potential legal, if not physical, battles over the energy resources in the region as too much risk for too little natural gas.
It will be an unfortunate setback for China if the Xihu Trough project produces less natural gas than expected. China, with a population of 1.3 billion, is seeing its energy needs grow at breakneck speeds in the midst of rapid economic growth. After nearly three decades of self-sufficiency, China became a net oil importer in 1993. In 2004, China surpassed Japan to become the world's second-largest oil consumer after the United States.
China's new dependence on foreign oil has sent it into a decade-long frenzy of overseas oil and gas acquisition projects from Australia to Angola. However, among Chinese national oil companies' limitations is an ability to conduct extensive offshore drilling projects. This constraint forces Chinese firms to partner with Western oil firms that have offshore experience and technologies. CNOOC has worked with Western oil firms in the past, but not enough of them to go out on its own just yet.
CNOOC's limited ability is a strategic liability for Beijing. In its global quest for energy sources, China is not only looking at resources in its own waters, including some of the disputed area between it and Japan, but is also casting its eye on the potential energy resources lying underneath waters around the disputed Spratly Islands in the South China Sea. In addition, China is partnering with West African nations that have oil reserves in the deep waters of the Gulf of Guinea. At the moment, these partnerships involve agreements to purchase oil, but China would like to drill there on its own -- if it knew how.
Due to lack of technology and insufficient experience, however, China cannot exploit these energy resources alone. This means even if the Chinese navy were to establish dominion over contested waters in the South China Sea, or if Beijing were to win a lucrative contract in Angola or Nigeria, it would be unable to fully exploit the resource.
The Xihu Trough project would not have been of sufficient magnitude to significantly boost CNOOC's capabilities, as the gas in the field is in relatively shallow waters, as are similar projects in the Bohai Sea and the Mouth of the Pearl River.
But the firm needs as much experience as it can get as fast it can get it -- China's energy security depends on it. |
