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Does China’s offshore oil and gas industry still need Western technology?

05th November 2014

Offshore deepwater production from fields within China’s territorial waters is growing exponentially and state players like CNOOC and CNPC want to go it alone without kowtowing to Western IOCs – but is this the end of European and North American involvement offshore China?

Does China’s offshore oil and gas industry still need Western technology?
Avoiding Chinese operators will become ever more difficult and financially damaging to equipment manufacturers

China’s oil and gas demand outstrips all other nations as its GDP and energy usage continues to grow. It wants to meet this demand from its own reserves as much as possible, but it’s European and North American service providers and original equipment manufacturers (OEM) that have traditionally held the keys to commercial oil and gas success.

This year has seen a raft of new fields come online and new wells spud offshore China as oil and gas companies race to produce near to this guaranteed market and centre of demand.

But something else is happening – Chinese firms are doing much of this exploration on their own.

The most notable of these is state-owned CNOOC (China National Offshore Oil Corporation), who has become an independent player in its own right in China’s territorial waters. In the third quarter of 2014 alone, the company achieved a significant discovery and drilled nine appraisal wells offshore China, in additional to commencing commercial production at the Enping 24-2 field (which includes 17 production wells, a fixed platform and an FPSO).

It made its first independent deepwater discovery, Lingshui17-2, in March this year in the Qiongdongnan Basin of South China Sea.

“For shallow water projects, after two decades of development experience, CNOOC is capable of executing whole projects on their own,” Howe Wang, GlobalData’s upstream analyst told Oil & Gas Technology.“CNOOC’s understanding of deepwater technology is still developing and thus recent deepwater success is mostly due to foreign participation.”

Another tactic of CNOOC, and other Chinese entities, is to acquire foreign registered companies once reliable production from Chinese fields has been proved – a tactic that national oil companies (NOCs) pursue in other regions such as the Middle East.

The most important of these transactions so far this year has been the USD 441m Fosun takeover of Roc Oil. Fosun is China’s largest privately held conglomerate and the move was its first entry into the oil and gas market. Roc Oil has numerous producing assets offshore China and its total oil production last year stood at 2.7 mmboe – making USD 45.2m net profit.

But acquiring equity in foreign oil and gas operators also means that Chinese firms are taking possession of equipment and engineering designs that were previous denied to them by Western equipment manufacturers fearful that their designs will be copied. But with China’s unrelenting growth and insatiable offshore demand, avoiding Chinese operators will become ever more difficult and financially damaging to equipment manufacturers.

“Chinese NOCs are aggressively developing their offshore technology and expertise via acquisition of foreign companies (Nexen, Unocal, etc), collaborating with foreign parties in international projects, and investing in domestic research and development,” Wang says.

“IOCs are invited to participate and operate these projects but Chinese companies independently execute projects once they have the capacity as demonstrated during shallow water project development. In recent years, Chinese firms’ technology has also developed very fast, both in terms of deepwater drilling and platform construction.”

So should foreign oil and gas companies shun collaboration with China to protect their own long-term interests? The short answer is no – Chinese offshore independence is unavoidable. Competition and collaboration will remain the source of innovation across the entire global oil and gas sector. Artificially asserting dominance over a sector through the long-term retention of technical knowledge is ultimately futile because trends in globalisation and communications will eventually circumvent local patent and copyright laws.

“CNOOC will absorb foreign technology and know-how via collaboration or firm acquisition and will ultimately be a determining factor in driving exploration and production. It is likely CNOOC will begin to operate whole deepwater projects in the next decade,” says Wang.

“Technology-wise, it is important, but based on the trajectory of offshore shallow water development, once Chinese firms have the capacity for independent development, they will carry out projects on their own since the bottleneck is technology and expertise rather than capital.”

Western manufacturers need to realise that collaboration with Chinese oil and gas entities will not endanger their businesses, but instead grow them. Western specialism isn’t individual designs, it is the engineering heritage, culture and education that goes into the creation of those designs, and this cannot be sold or stolen very easily.

“The opportunity for IOCs emerges at the current early stage of deepwater development because there is a need for access to technology and expertise; this will diminish over time as the domestic operators become more proficient and self-reliant,” Wang says.

So, although IOCs may become less dominant offshore China, Western manufacturers will still be able to find a strong market for their products as long as they are willing to work within a Chinese framework.

What is more, Chinese domestic success is likely to overspill into neighbouring Asia Pacific plays and being well positioned with Chinese operators like CNOOC and CNPC will open Western manufacturers to a variety of emerging markets, in the same way as has previously happened by working with large Western IOCs.

“Deepwater exploration in China is still in an early stage, but if successful could fuel interest in the neighbouring basins,” comments Wang.

China’s continuing policy of economic reform and opening up will slowly remove the stigma and fear of working as a supplier to Chinese operators. Free trade and competition will erode the operational borders between Chinese and foreign IOCs, and the opportunities presented by production-hungry Chinese exploration and production entities will be huge.

Yes, Chinese firms do create their own equipment for use domestically and overseas, and they do design tools based on Western models. But, as yet, Chinese firms do not create the game changing technology that can dramatically improve exploration success or oil recovery rates.

Innovation remains the key to opening new frontiers of oil and gas production.

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