CNOOC to Expand CBM Output in China

Chinese energy giant CNOOC Ltd. (CEO - Analyst Report) intends to enter the domestic unconventionals market as it inked a 9.93 billion yuan ($1.56 billion) deal with China United Coalbed Methane Corporation Ltd. – owned jointly by CNOOC’s parent company, China National Offshore Oil Corporation (CNOOC Group), and China National Coal Group Corp.

The deal entails exploration of coalbed methane (CBM) in China over the next five years. The companies’ plan to explore, develop and generate methane gas in China forms part of the 30 year agreement.

Per the agreement, exploration would span over 10,866 square kilometers (4,195 square miles). It will cover provinces of Shanxi, Shaanxi, Anhui, Shandong, Yunnan, Ningxia, Hebei, Hubei and Henan. The coalbed methane produced from the project in future, would be allocated among CNOOC and China United.

CNOOC is likely to shell out around 9.71 billion yuan in the first phase of exploration, while another 220 million yuan is expected to be spent in phase two.

CNOOC has agreed to take up about 70% of future development and production expenses of a coalbed methane field, while the remaining 30% will be taken care of by China United. However, China United can exercise options by which it can either raise or decrease its cost sharing percentage to a maximum of 50%.

Currently, China has allocated 100 billion yuan towards increasing coalbed methane production twofold by 2015. Beijing proposes gas production of around 30 billion cubic meters (bcm) from coal seams by 2020. This would represent about 15% of China’s total gas output, a substantial increase from 5% in 2011.

Beijing plans to increase the share of natural gas nearly two times in its energy mix by 2015 and reduce the usage of coal intending to alleviate pollution and cut down greenhouse gas emissions.

Recently, CNOOC also struck a deal to purchase Canadian energy producer Nexen Inc. (NXY). The deal, the country’s biggest foreign takeover so far, reflects the international land grab trend among the Chinese energy companies.

CNOOC holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. Longer term, we maintain our Neutral recommendation.