PetroChina, the nation's largest oil producer, is applying for exploration and production licenses for the South China Sea, hoping it will become a cash cow as new onshore supplies have been stagnant in recent years.

Analysts said PetroChina's move could intensify the competition in the offshore oil and gas sector, although it will be difficult to shake the dominance of China National Offshore Oil Corp. (CNOOC) in Chinese waters in the short term. It will take time for PetroChina to accumulate experience, technology and skill in offshore operations, which are more complicated and risky.

PetroChina, listed on the New York and Hong Kong stock exchanges, has applied to the Ministry of Land and Resources for oil and gas exploration and development licenses in the southern South China Sea.

A senior engineer with Exploration and Development Research Institute of the China National Petroleum Corp. -- PetroChina's parent company -- said that the government is encouraging domestic oil companies to accelerate offshore exploration.

The government seeks to increase oil and gas supply to alleviate the risk of over-reliance on imports.

China's potential undersea oil fields have not been exploited to the same extent as the land fields.

Offshore oil output last year reached 20.9 million tons, up 4.2 percent from the year before, and accounting for 13.0 percent of China's total oil output.

CNOOC and its foreign partners produce nearly all of China's offshore oil.

But the CNPC engineer noted that the offshore area is too large for CNOOC to work alone. "The government is coordinating the relationship among Chinese oil companies to allow more players in the area," he said.

Traditionally, PetroChina conducts its exploration and development activity onshore and in shallow waters, although there are no legal or regulatory restrictions to keep it from working in waters deeper than five meters.

PetroChina's production has been flat for several years and most of its oilfields are drying out after decades of use. Few significant new finds have been made.

Analysts said PetroChina chose the South China Sea because CNOOC has done little exploration in the area, increasing PetroChina's chance of making new discoveries.

If PetroChina's license is approved, all three of the nation's largest oil companies will be permitted offshore exploration.

Sinopec, the second largest oil company in China, won offshore exploration rights after it acquired China National Star Petroleum Company four years ago. It is working with CNOOC, Royal Dutch/Shell and Unocal to search for natural gas in the East China Sea.

Experts said that PetroChina's participation is unlikely to rock CNOOC's dominance in the short term. Offshore exploration costs could run five to six times higher than onshore, offshore exploration entails greater risk.

Also, PetroChina lacks the experience, equipment, talent and technology to tap the South China Sea where geographical features are more complicated. Some experts believe PetroChina will have difficulty unless it teams up with a foreign company.

The current laws and regulations make CNOOC the sole company eligible to partner with foreign companies to conduct exploration and development in Chinese waters.

PetroChina's approach paves the way for it to apply for right to cooperate with foreign partners in offshore production.

(China Daily July 6, 2004)