New Frontier in Offshore Exploration

Deployment of deepwater oil rig is sign that China is stepping into the big league

China National Offshore Oil Corp, the country's biggest offshore energy exporter, started drilling from the nation's first deepwater oil rig (Ocean Oil 981) in the South China Sea on May 9 - thus moving the country on to a new frontier in international oil exploration.

According to international standards, depth exceeding 1,000 feet (305 meters) is defined as deepwater, and more than 5,000 feet as ultra-deepwater. Ocean Oil 981 used by CNOOC to drill the Liwan 6-1-1 well has water depth of 5,000 feet and designed well depth of 7,780 feet.

Offshore drilling rigs have been classified in nominal "generations" depending upon the year built and water depth capability. Though Ocean Oil 981 is classified as the sixth generation, it is not the most advanced mobile offshore drilling unit, which is capable of operating in water depths of up to 12,000 feet and constructing wells 40,000 feet deep.

However, drilling of the nation's first deepwater oil rig indicates that China's deepwater drilling technology has improved, and signals that China is beginning to close the gap with major oil drilling countries in the area of deepwater drilling.

From the commercial point of view, deepwater oil drilling has high risk and the investment may not bring a high return in a short term. But the first deepwater drilling does have a profound impact on China's future oil production, its reliance on foreign oil, and overseas activities of China's national oil corporations.

Deepwater offshore drilling will decrease China's reliance on foreign oil

China was the largest oil exporter in Asia until 1993. But China now has 90 times more cars than 10 years ago. Last year 14.5 million cars were sold in China, outpacing America's 12.8 million. Nine in 10 were people who had never bought a car before. China's booming economy plus a large-scale transition away from bicycles and mass transit toward private automobiles require massive levels of energy. Though China relies on coal for most of its energy needs, it is now the second largest oil consumer in the world behind the United States.

China's ability to provide for its own needs is limited by its onshore oil reserves. China currently depends on import for more than 55 percent of its oil. With the breakthrough of China's deepwater offshore drilling technology, CNOOC ambitiously set a target to boost oil and gas output to 120 million tons of oil equivalent by the end of 2020, doubling that of 2010, which will help reduce China's reliance on foreign oil.

Deepwater offshore drilling will change current structure of oil production

China possesses 18,000 km of coastline and a continental shelf of 1.3 million sq km. China's rich offshore resources are mainly located in the Bohai Bay region, the East China Sea and the South China Sea.

The South China Sea is the world's fourth largest deepwater region for oil and gas exploration after the Gulf of Mexico, Western Africa and Brazil. The South China Sea region has proven oil reserves of around 1.2 km3 (7.7 billion barrels), with an estimate of 4.5 km3 (28 billion barrels) in total. Natural gas reserves are estimated to total around 7,500 km3 (266 trillion cubic feet).

However, China's offshore oil resources are far from being fully exploited. China's current structure of oil production is 85 percent of overall production from onshore reserves and the remaining 15 percent from offshore reserves. This compares with 62 percent from onshore reserves, and 38 percent from offshore reserves in the US.

This is largely due to China's late involvement in the offshore oil and gas industry. China lacked key deepwater drilling technology to overcome challenges in deepwater equipment operation, and thus was not able to independently explore its own reserves.

According to recent international energy statistics, deepwater sites normally have significant resources and very high potential flow rates. The average size of a new deepwater discovery in 2009 was about 150 million barrels of oil equivalent compared with an onshore average oil of 25 million barrels. With the breakthrough of China's deepwater offshore drilling technology, China has a chance to greatly increase its offshore oil production and change its current structure of oil production.

Deepwater offshore drilling will help expand overseas activities of Chinese oil companies

Chinese national oil companies started investing in overseas upstream oil and gas assets in 1993, and intensified their efforts in the latter part of the decade. In recent years, the major Chinese national oil companies - China National Petroleum Corporation, China Petroleum & Chemical Corporation and CNOOC have emerged as significant players in global mergers and acquisitions in upstream oil and natural gas.

The operation of China's first mobile offshore drilling unit demonstrates the new level of Chinese companies' technology and will help them to further expand their overseas activities.

First, Chinese oil companies will be more capable of being involved in overseas deepwater drilling projects. Chinese companies' overseas investments have been limited by their technologies.

It was generally believed that China's key technologies used in deepwater equipment were behind those of the countries advanced in offshore exploration and development by 15 and 20 years, which restricted Chinese oil companies' ability to bid and win overseas deepwater projects.

For example, CNOOC and Sinopec have been major players among international oil companies in Angola. Oil production in Angola is concentrated in numerous offshore blocks. In recent years, China has provided several multibillion-dollar oil-backed loans to fund infrastructure development.

At the same time, Chinese firms are playing an important role in Angolan recovery while Angola has become one of the leading suppliers of oil to China. However, China, lacking technology, could not independently win any deepwater block projects.

Second, China may avoid paying a price above market value in some of its investment projects in the future. Chinese oil companies' most frequently cited objectives for investing internationally are to increase their oil and gas reserves, to expand production and to diversify their sources of supply. In fact, expanding control over resources and supply is not the only motivation. Another key motive for Chinese oil companies is to gain technical know-how.

Though evidence regarding whether Chinese oil companies have generally paid higher prices overseas is mixed, that they pay a premium to gain technology for their joint venture deals in deepwater projects is obvious. In Africa, Chinese oil companies paid for establishing partnerships with technologically-advanced international companies for the purpose of gaining technical knowhow by forming alliances.

The situation now is different. China has made a substantial step in its technical expertise in deepwater exploration.

The impact of Ocean Oil 981's operation is profound, and not limited only to oil production and/or business opportunities. It could reshape China's going-out strategy, and push China into a new frontier as a maritime power.

The author is an economics professor at University of Maryland University College. The views do not necessarily reflect those of China Daily.