August 06, 2012

CNOOC a Key Element in Beijing’s South China Sea Energy Strategy

The state-run China National Offshore Oil Corporation (CNOOC) is becoming an increasingly important element in Beijing’s South China Sea energy strategy.

According to The Times of India, CNOOC recently made a $15 billion bid to acquire Canada’s Nexen Inc., a company with deep expertise in offshore drilling that Beijing would like to tap into in order to exploit potential oil and natural gas resources in the South China Sea.

Beijing’s drive to develop advanced offshore drilling capability is seen in many ways as a cornerstone of its strategy to exploit the potential energy reserves beneath the South China Sea. According to some Chinese media reports, an estimated 70 percent of oil and natural gas reserves lie in deep-water reserves, at depths of over 300 meters. To date, however, China’s energy companies have lacked the technical capability to exploit these reserves, often drilling in shallower waters. In particular, CNOOC’s expertise in advanced offshore drilling has fallen behind other privately-held international oil companies that can drill to depths beyond 10,000 meters.

But that could all be changing. In May, CNOOC began operating China’s first-ever deep-water drilling rig that some observers say could prepare China to begin drilling to depths of between 10,000 and 12,000 meters, possibly eclipsing the record set in 2009 by the Deepwater Horizon rig that drilled to 10,683 meters. And CNOOC’s bid for Nexen Inc. may help the state-run company acquire additional technological expertise that it needs to successfully exploit the South China Sea’s deep sea resources.

Of course the deal to acquire Nexen is far from guaranteed, and even if CNOOC does acquire the company it will likely face a steep learning curve in how to use Nexen’s technology. As The Times of India noted, “The acquisition of Nexen, which faces reviews by both the Canadian and US 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.”

Regardless, CNOOC’s importance should not go unnoticed by policymakers charged with helping diffuse tensions in the region. China’s foray into deep-water drilling will raise the stakes in the South China Sea. Countries like Vietnam and the Philippine that also seek to exploit the region’s deep sea fossil fuel resources could become increasingly worried about their ability to exploit resources if China gets there first – potentially increasingly the number of incidents to obstruct offshore oil and natural gas drilling activities.

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