August 3, 2012 / 7:48 PM / 8 years ago

CNOOC-Nexen deal seen helping China's South China Sea thrust

WASHINGTON (Reuters) - The $15 billion bid by China National Offshore Oil Corp (CNOOC) to buy Canada’s Nexen, Inc will help the Chinese state giant gain the expertise to drill in deep, disputed waters of the South China Sea without relying on risk-averse foreign firms.

A woman walks into the Nexen building in downtown Calgary, Alberta, July 23, 2012. REUTERS/Todd Korol

The acquisition of Nexen NXY.TO — which faces reviews by both the Canadian and U.S. governments — will not be an instant game changer, however, because deepwater technology will take years for China to master, say experts on China’s energy sector.

CNOOC, parent of Hong Kong-listed CNOOC Ltd (0883.HK), has emerged as a key component of China’s strategy to bolster its claims to nearly the entire South China Sea. The vast body of water, believed to hold rich oil and gas reserves, is also claimed in part by Vietnam, the Philippines, Taiwan, Brunei and Malaysia.

China’s policy has also included diplomatic pressure aimed at keeping the 10-member Association of South East Asian Nations (ASEAN) divided over the sea dispute; the establishment of a city government and military garrison at Sansha city in the Paracel Islands; and more assertive patrols of contested seas.

The intensifying squabble in waters that carry $5 trillion in annual trade drew a statement of concern on Thursday from Washington, which officially is neutral on the dispute.

“The nations of the region should work collaboratively and diplomatically to resolve disputes without coercion, without intimidation, without threats, and without the use of force,” said Patrick Ventrell, a State Department spokesman.

CNOOC become more deeply involved in China’s South China Sea strategy in late June when it invited foreign firms to bid on oil blocks that overlap territory being explored by Vietnam. Earlier CNOOC unveiled the Haiyang Shiyou (Offshore Oil) 981 rig, China’s first domestically made ultra-deepwater rig.

The CNOOC tender drew a protest from rival Vietnam’s Petrovietnam, and most analysts expect that international majors — private Western firms who monopolize the technology to drill in deeper water — will shy away from investing in contested waters.

“They may actually go so far as to buy the bids themselves to see what the Chinese are up to, but I think companies are very, very leery of getting involved in areas that are so hotly disputed,” said Bonnie Glaser, a China expert at the Center for Strategic and International Studies, a Washington think tank.

“This is more a statement that the Chinese are making, rather than a serious expectation that there will be any real international bidding,” she told reporters in a conference call.

This is where the Nexen deal offers China the deepwater drilling know-how to move from the shallow or mid-depth waters, where CNOOC is already drilling, to deeper waters in areas where its claims overlap with Vietnam and others.

“There’s plenty of deep water to be explored, but a lot of it has been off-limits because of the disputes,” said Mikkal Herberg, research director of the Energy Security Program at the National Bureau of Asian Research, a Seattle institute.

“They think about this very specifically — having their own capabilities so they can drill where they want without international partners,” he said of China’s oil industry.

Nexen, Canada’s 10th biggest oil company, has oil sands operations in the Canadian province of Alberta, shale gas in the province of British Columbia and extensive exploration and production holdings in the North Sea, Gulf of Mexico and offshore West Africa.

With the Nexen acquisition comes deepwater fields in the Gulf of Mexico that would bring with it expertise in managing complex operations and technology that, once assimilated, would extend CNOOC’s reach in the South China Sea.

The deal would give CNOOC — an $89 billion company with oil and gas assets in Indonesia, Iraq, Australia, Africa, North and South America, as well as China — “normal, competitive technology that all major oil companies need ... with an overlay of Beijing strategic interest,” said Herberg.

The capacity to set up and maintain stable rigs in 5,000-10,000 feet of ocean water and drill 10,000-18,000 feet deep in sediment, would not come overnight, experts said.

“Unlike refining and petrochemical technology, you can’t simply just buy this technology (and use it). If you do not have experience you will have problems,” said Kang Wu, managing director of consultancy FACTS Global Energy in Honolulu.

“They still need foreign technologies — that’s the basic status. If they want to acquire everything they still need five or ten more years,” he added.

Herberg, a 20-year veteran of the oil industry, noted that the Western majors have been going deeper and deeper over 15 to 20 years of trying.

“Getting a couple of these production rigs is not going to leapfrog (China) into a superior technology position. This is a slow, gradual position,” he said.

Editing by Warren Strobel, Gary Hill

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