CNOOC Eyes Acquisition of China United Coalbed Methane Co.

CBM Promise Tempts CNOOC Onshore

According to China Business News, citing unidentified persons familiar with the negotiations, offshore giant China National Offshore Oil Corp. (CNOOC) is reportedly considering buying a 50% stake in one of China's most prominent coalbed methane (CBM) producers. China United Coalbed Methane Co. Ltd (CUCBM). CNOOC is still reportedly assessing the value of CUBCM, and the source did not state how much a potential deal could be worth.

News of CNOOC's interest in CUCBM follows the recent granting of rights to China National Petroleum Corp. (CNPC), China Petroleum & Chemical Corp. (Sinopec), and Henan Provincial Coal Seam Gas Development & Utilization Co.. to carry out exploration and development of CBM reserves with foreign companies (see China: 6 December 2010: Chinese Companies Win Government Approval for CBM Co-Operation with Foreign Companies). CNOOC, the largest offshore oil and gas producer in China, was noticeably absent from this list despite a clear interest in working with foreign companies to develop its CBM business—as evidenced earlier in 2010 through the purchase of a 5% interest in BG Group's CBM tenements in the Surat basin in Queensland State, Australia (see Australia: 25 March 2010: CNOOC Signs Landmark CBM-to-LNG Supply Deal with BG Group).

CNOOC's reported attempts to acquire a stake in CUCBM probably serves two main objectives. First, it will allow CNOOC to enter China's onshore CBM sector. While CNOOC dominates offshore exploration and production activities in the Bohai Bay and in the South China Sea, the company has no onshore acreage, due to the historical division of China's upstream sector between the three NOCs. This means CNOOC—already the smaller and politically less well-connected of China's three main NOCs—is in danger of missing out on opportunities to acquire acreage and increase its reserve-replacement ratios as China intensifies efforts to explore its CBM potential. Acquisition of a stake in CUCBM would allow CNOOC to compete more effectively with CNPC and Sinopec for new acreage, given that, post government approval, these companies will try and accelerate domestic exploration and development operations by firming up deals with IOCs (see China: 14 July 2010: PetroChina and BP to Jointly Develop CBM in Xinjiang).

Second, acquiring a stake in CUCBM will allow CNOOC to continue advancing its technical expertise in the CBM sector. This is in line with its long-term strategy to become a globally competitive NOC. Until recently, CUCBM was the only company allowed to co-operate with foreign firms in the CBM sector, and had been working with a number of companies including global leaders in the sector like Dart Energy—drawing on their techniques and technologies to overcome technical challenges including low pressure and permeability at some CBM reservoirs. A stake in CUCBM would open opportunities for CNOOC to develop its technical skills while establishing business relationships with foreign CBM companies—potentially opening up new investment opportunities overseas.

Outlook and Implications

CNOOC is probably attracted by CUCBM's large CBM acreage portfolio, which according to IHS GEPS comprised of 27 CBM contract blocks with a total acreage area of 20,151 sq. km following the company's reorganisation and the exit of PetroChina from the equity joint venture.

CUCBM's acreage in the Qinshui basin in Shanxi province is probably most attractive to CNOOC. This basin has emerged as the first CBM production area in China, and CUCBM already has the Fanzhuang and Zhengzhuang projects in the area with a 600 mmcm/y production capacity. CNOOC Gas & Power has been exploring opportunities for expanding its gas business in Shanxi by drawing on local CBM resources. The company has been investigating opportunities to construct synthetic natural gas (SNG) plants and power-generation facilities fed by CBM, which can increase its competitiveness in the local gas market. CNOOC's investments could also help Shanxi to begin efforts to diversify reliance on coal mining as a provincial revenue source. Having a stake in CUCBM would allow CNOOC to expand its CBM marketing activities. CUCBM previously announced plans to build a 4 bcm/y CBM pipeline stretching from the Qinshui basin to Jiangsu province, with construction due to start in 2012. CNOOC could potentially help finance this project, which would support the company's own efforts to boost its share of the gas market in Jiangsu, as also evidenced by plans to establish a 3 million t/y re-gasification facility at Yancheng City.

Acquisition of a stake in CUCBM promises significant benefits for CNOOC, although the question is whether the government would be supportive. CNOOC might be looking to win government departments over by promising to inject capital into CUCBM to accelerate development of CBM projects given that CUCBM's production levels have lagged behind government expectations in previous years. CNOOC has a formidable record of getting things done, as evidenced by the company's 59.5% year-on-year (y/y) growth in crude production, and 60.9% y/y growth in natural gas production from the Bohai Bay in the first half of 2010, which might strengthen its credentials as a partner. Further, the government has been supportive of CNOOC's CBM forays abroad, which promise to increase its long-term competitiveness. Nevertheless, with some rivalry between domestic coal and oil companies over who should have rights to develop CBM resources, it is rather uncertain whether China Coal Group—which also has shares in the company—would be supportive of a potential farm-in.