Cnooc Targets Assets, Unconventional Energy to Boost Output

Cnooc Ltd. (883), China’s biggest offshore oil and gas producer, plans to increase output by starting new deepwater fields, buying overseas assets and accelerating development of unconventional energy resources.

The energy explorer will maintain its goal of boosting production by 6 to 10 percent for the five years ending 2015, Chief Executive Officer Li Fanrong said, after Cnooc reported yesterday that output came in at the low end of a reduced target last year. The company said it will increase capital spending by as much as 63 percent in 2012 as it develops more fields.

Cnooc, which relies on areas off the Chinese coast for 80 percent of its production, slashed its output goal after oil leaks shut the country’s biggest field and it failed to complete an acquisition in Argentina. To boost reserves, it has bid for at least $7.8 billion of overseas assets in the last two years, including shale-gas and oil-sand acreages in North America.

“Cnooc needs to step up overseas acquisitions if it wants to elevate its production growth toward 10 percent,” said Wu Fei, a Hong Kong-based analyst at BOCOM International Holdings Co. “Unconventional energy is strategic to Cnooc’s long-term growth but may not contribute to production immediately since it takes years for commercial output to start.”

The energy explorer prefers assets that can support long- term growth to those that boost production in the short run, Chief Financial Officer Zhong Hua said today. Cnooc also prefers to join overseas projects as a developer and operator than as an equity investor, he told reporters in Hong Kong.

The unit of China National Offshore Oil Corp. said it aims to produce the equivalent of 330 million to 340 million barrels of oil in 2012, a gain of as much as 2.7 percent from last year.

Biggest Offshore Field

The shares have fallen 20 percent in Hong Kong trading in the past year, lagging behind gains of 13 percent and 3.1 percent in rivals China Petroleum & Chemical Corp. and PetroChina Co. (857), respectively. Cnooc dropped 1.9 percent to HK$15.46 today, compared with the 1.3 percent increase in the benchmark Hang Seng Index. (HSI)

Production was about 331 million to 332 million barrels last year, compared with a revised target of 331 million to 341 million, Cnooc said.

China shut Penglai 19-3 field in Bohai Bay Sept. 2, saying operator ConocoPhillips failed to contain leaks since June. The closure of the field, of which Cnooc owns 51 percent, led to an output loss of 62,000 barrels a day. The field will resume production this year, Li told reporters in Hong Kong yesterday.

Cnooc further scaled back operations when it shut two gas blocks in the South China Sea Dec. 19 because of an undersea pipeline leak. The stoppage idled the equivalent of about 26,700 barrels of oil a day. The pipeline has been repaired and production has resumed, said Li, who became CEO in November.

Capital Spending

Capital spending may rise to $9.3 billion to $11 billion this year as Cnooc accelerates development of deepwater wells and unconventional energy, the company said.

“We see the higher capex spend as a positive signal for production in 2013,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a report. “Cnooc underinvested in 2011 with $6.7 billion versus a target of $8.8 billion, which has led to weak production in 2012.”

The energy explorer expects to start production this year at Weizhou 6-9/6-10, Yacheng 13-4, Panyu 4-2/5-1 and Liuhua 4-1, all of which are in the South China Sea, according to presentation slides posted on its website yesterday. Cnooc said it plans to drill three deepwater exploration wells in the area and acquire more seismic data.

The company has also started exploring its first shale-gas site in China, joining rivals including PetroChina in the search for the unconventional fuel, Cnooc’s parent said Jan. 11.

Shale Gas

Cnooc completed the purchase of oil-sands producer Opti Canada Inc. Nov. 28. for $2.4 billion. That followed the acquisition of stakes in U.S. shale-gas acreage from Chesapeake Energy Corp. (CHK) for a total of $1.65 billion in February 2011 and November 2010.

“What we learned from Chesapeake is very useful, but we cannot copy everything and apply them in China as the geology is different,” Cnooc’s Zhong said. The company plans to hire field-services contractors to help tap the fuel when its domestic shale-gas projects begin operation, he said.

Not all of Cnooc’s overseas bids have been successful. Bridas Corp., a venture co-owned by Cnooc, canceled a deal to buy BP Plc’s stake in Pan American Energy LLC Nov. 5 after Argentina ordered oil companies to repatriate future export revenue. Cnooc’s Yang Hua resigned as CEO that month.

The $1.47 billion acquisition of Tullow Oil Plc’s Uganda prospects is still pending, with local lawmakers delaying approval of the sale since last year.

“It has become harder and harder to acquire good overseas assets, but this applies to every oil company,” Zhong said. “From that perspective, it’s still a fair game.”

To contact the reporter on this story: Guo Aibing in Hong Kong at aguo10@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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Cnooc Targets Assets, Unconventional Energy to Boost Output

Nelson Ching/Bloomberg

The headquarters of Cnooc Ltd. stand in Beijing, China.

The headquarters of Cnooc Ltd. stand in Beijing, China. Photographer: Nelson Ching/Bloomberg