CNOOC''s Gas Strategy and What''s Next for Nexen

It's been a year since China National Offshore Oil Corp. (CNOOC) bought the Canadian oil and gas giant Nexen Energy, and now the hard work has begun.

Tangible benefits are expected from the company's Aurora LNG project, Nexen's huge undertaking that's slated to transfer the energy wealth of Canada's gas fields to China and other Asian countries through a network of liquified natural gas facilities.

In November, CNOOC officials said its Nexen subsidiary had signed a land-use agreement with the province of British Columbia that set the stage for what could be a US$ 20 billion investment in Aurora. The first step is a feasibility analysis for building an LNG processing plant and export terminal at a site called Grassy Point, near the BC port city of Prince Rupert.

The project would allow Nexen to extract shale gas and export LNG to markets in the Asia-Pacific region as early as 2021. Nexen would control 60 percent of a venture. Partners would include two Japanese LNG sector players, the Inpex Corp and JGC Corp.

CNOOC CEO Li Fanrong said he thinks LNG exports are "Nexen's best choice for maximizing shale gas business value in Canada."

Aurora would tap a shale gas block in northern British Columbia that comprises a major portion of Nexen's global energy reserves. The company controls rights to 1.5 trillion cubic feet of gas. The rest of this target area, called the Liard block, contains an additional 2.3 trillion cubic feet of prospective reserves.

Pipelines and an LNG terminal would be the project's biggest investments. The terminal will include a plant for gas compression and liquefaction, docks, power plant, roads and other infrastructure.

Before work can begin, the company will have to complete environmental impact studies and work out deals with local communities that would be crossed by the proposed pipeline.

CNOOC needs the Canadian energy to meet customer demand. The company's current mid- and long-term LNG contracts have totaled annual production of 21.6 million tonnes, while the company has set a production goal of 40 million tonnes annually by 2020, when many of its contracts expire.

Production Targets

According to a CNOOC strategic outlook issued January 20, the company has set a 2014 production goal of between 422 and 435 million barrels of oil equivalent (BOE), with the Nexen subsidiary contributing 69 million BOE. The goal represents a scheduled increase of 2.4 to 5.6 percent over the company's 2013 output level.

Commenting in CNOOC reports released over the past two years, company officials repeatedly cited interest in "comprehensively increasing annual production 6 to 10 percent every year from 2011 to 2015."

Nexen accounted for 15 percent of CNOOC's total BOE production. But the company needs more growth to meet its goals and Chinese demand.

China's domestic natural gas production is insufficient to meet this climbing demand. In 2012, demand was 143.8 billion cubic meters, of which 40 billion had to be imported. It is estimated that dependence on imported natural gas will exceed 35 percent by 2015.

China National Petroleum Co.'s (CNPC) natural gas pipeline handles most of the imported natural gas. But LNG, which generally arrives by ship, accounted for almost half – 47.2 percent – of the imports in 2013.

CNOOC controls most of China's LNG imports and sales. In 2012, for example, the company handled more than 70 percent of domestic LNG imports.

It was back in the mid-1990s that CNOOC was entrusted by the former State Planning Commission to lead LNG port project development along the east coast. CNOOC officials at the time hoped the LNG business would give the company a competitive advantage over state-run rivals CNPC and China Petroleum & Chemical Corp. (Sinopec).

To avoid having to rely on CNPC's natural gas pipelines and sales networks, and to make use of downstream operations, CNOOC established the CNOOC Power and Gas Group in 2006. The group's tasks included taking over and running the integrated operations and management divisions of CNOOC's gas and power generation business.

(caixin.com, edited by Topco)