CNOOC May Lose Exclusive Right for Sino-foreign Offshore Oil Block Development
Year:2009 ISSUE:4
COLUMN:M & A, BUSINESS & TRADE
Click:217    DateTime:Feb.17,2009
CNOOC May Lose Exclusive Right for Sino-foreign Offshore Oil Block Development     

The National Development and Reform Commission (NDRC) and the nation's top three oil companies Sinopec Group, China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC) and related companies have discussed for several times over eliminating CNOOC's sole right to cooperate with foreign companies in oil and gas exploration offshore China. This is despite that they have yet to reach an agreement as to how to open the offshore oil and business.
   This means CNOOC may lose its exclusive right not long after.
   "In a long term view, the offshore oil and gas exploration and production sector needs further opening-up, which is in line with the market principles of opening and competition. But this requires a right time," said an official at the National Energy Administration under the NDRC.
   A petroleum expert at the national decision-making taskforce said CNOOC has a monopoly in China's offshore oil and gas production for long because of the exclusive right. CNOOC's oil and gas assets are mainly controlled by its listed arm CNOOC Ltd. (HK: 0883). But as a public company, it should not enjoy such right. "So it's only a matter of time for this to change," he said.
   China's State Council has issued a regulation regarding Sino-foreign offshore oil exploration in January 1982, which gives CNOOC the sole right in such cooperation offshore China with foreign partners in fields including oil exploration, production and sales.
   Any foreign companies wanting to dig oil in Chinese waters must sign contracts with CNOOC. The foreign side shoulders the exploration costs, and once a reserve is found, CNOOC gets a 51% interest gratis.
   As China has opened its onshore oil and gas fields, it should do the same to the offshore sector by gradually bringing in competition and more players, a PetroChina executive said. A company should have integrated upstream and downstream businesses, onshore and offshore, if it wants to become an internationalized company, he said, citing major international oil companies.
   Although Sinopec Group and CNPC own some offshore fields, but they cannot partner with foreign companies. This makes them unable to hedge risks and obtain oil resources for free, given the higher technological requirements and costs for offshore oil exploration. As a result, the two oil giants have been pressing the government for a change in the rule, while preparing themselves for the offshore business.
   It would still take some time before the elimination of CNOOC's exclusive right becomes a written rule, the National Energy Administration official said.
   A deputy director of the oil and gas center under the Ministry of Land and Resources also considered this not an easy thing. "This involves laws and rules, if you want to break CNOOC's monopoly, you have to revise the 1982 regulation," he said.