CNOOC under pressure on LNG sources

CNOOC under pressure on LNG sources

 

By Richard McGregor and Francesco Guerrera in Beijing

Pressure is increasing on China National Offshore Oil Corporation (CNOOC) to find new sources of liquefied natural gas following last week's announcement of a long-term contract between Chevron and Japan's main gas distributor.

China's largest offshore energy company and Chevron have been at loggerheads over the price to be paid by CNOOC for LNG gas from the US group's Gorgon field.

The stalemate could force CNOOC to look elsewhere for supplies, the Beijing-based company's top executive told the Financial Times last week. "China is a very large potential market, but not immediately a high gas price market," said Fu Chengyu, the chairman and chief executive of CNOOC, which this year lost a US$18bn takeover battle with Chevron over Unocal.

"They are trying to find more potential buyers. We are also looking for potential suppliers."

Chevron announced on Thursday it would sell 1.2m tonnes of LNG a year to Tokyo Gas, starting in 2010, and also a possible equity stake.

Executives at CNOOC and Chevron said the discussions over Gorgon, a vast field off the coast of West Australia coast, had stalled over pricing but had not been abandoned.

A collapse of the protracted talks would raise concerns over CNOOC's strategy in the gas market only months after its defeat in take-over Unocal, a California-based oil group. Mr Fu remains under pressure from the Chinese government, CNOOC's majority shareholder, to find upstream reserves, which is increasingly difficult given uncertainties about both domestic and global prices.

CNOOC was envisaged as a cornerstone customer of Gorgon and agreed in 2003 to take a 12.5 per cent stake of the Gorgon project as part of a 25-year supply deal. It is pioneering the LNG business in China and signed two long-term contracts with fields in Australia and Indonesia in 2002, to be supplied through two new terminals in Guangdong and Fujian. But the spot price of LNG has increased by three to four times since then, straining negotiations over new supply deals.

Chinese buyers face an especially difficult market, because of government regulation of gas prices and the abundance of cheap coal as an alternative fuel. "At the beginning if you have a very high price, nobody will use it," said Mr Fu.

John Gass, president of Chevron Global Gas, said "price and timing" had been the biggest obstacles in the US company's failure to conclude an agreement with CNOOC. "Our hope is that we can keep the dialogue open," he said. Chevron was continuing to look for customers in the US, Mexico, Japan and South Korea. Chevron, owns 50 per cent of the Gorgon fields and is the project's operator. The remaining equity is held by Shell and Exxon Mobil, with 25 per cent each.