State bosses at PetroChina and China Petroleum & Chemical Corp (Sinopec) rarely offer themselves up for public exposure. As 'public servants', discretion is seen as the better part of valour and ahead of my meeting with CNOOC chairman Fu Chengyu, I was reminded that our discussion would be 'strictly business'.

CNOOC has been the most aggressive among the oil trio (excluding some non-listed operations of PetroChina and Sinopec) in expanding overseas, having already bagged three gas field acquisitions in Indonesia and Australia. A preliminary agreement for another field in Australia has been signed.

As such, the firm is a key pillar in China's attempt to secure long-term supplies of energy from diversified sources. Despite lacking the refining and distribution capabilities of its domestic peers, CNOOC, along with its parent China National Offshore Oil Corp, has carved a niche as an integrated natural-gas firm.

Its overseas operations are emerging as key pieces in an international mosaic of energy investments. In Indonesia and Australia, it aims to extract gas for partial shipment back to China, where it will be regasified and distributed to users through pipelines. This will be achieved at LNG (liquefied natural gas) regasification terminals in Guangdong and Fujian provinces and others planned in Zhejiang, Tianjin, Shanghai and Jiangsu.

Its rivals have signalled their intent to get in on the clean-fuel game, with PetroChina and Sinopec looking at importing LNG from Sakhalin Island, off Russia's east coast. Sinopec may import gas from Saudi Arabia and has plans to build an LNG terminal in Shandong province.

In addition, Zhuhai Zhenrong Corp, one of the country's four state oil-trading firms, has a framework deal to import LNG from Iran from 2008, turning up the heat in a battle for customers.

Five months into the job, Mr Fu, speaking in Mandarin blended with occasional English - probably a habit acquired from his years at the University of Southern California and Phillips Petroleum (now ConocoPhillips) - rejected suggestions that Beijing was allocating projects among the majors by fiat.

'The three [LNG] projects we are undertaking are not handouts or a result of allocation from the [central] government, it is up to the market and the local governments to decide.

'Questions they would ask include whether [we] have secured gas supply for the next few decades. Do [we] have the necessary technology?'

Adopting a slightly condescending tone, he played down the competitive threat from domestic rivals.

'Our deals were done when the other [oil firms] did not even know what the business was about.

'Now they see that this is a rather good business, they want to enter the market. So we will compete with them.

'At least we are more experienced in the business.'

CNOOC's ambitions will see it cross swords with PetroChina, the much-vaunted west-east pipeline of which will transport gas from western and northern China to Shanghai, the inland provinces of Henan and Anhui, and the coastal provinces of Jiangsu and Zhejiang.

That venture is slated to be able to operate at a full capacity of 12 billion cubic metres (bcm) by 2009, with the potential to increase to 18 bcm thereafter.

Future turf wars seem to be looming. Construction on the second leg of PetroChina's Shaanxi-Beijing gas pipeline starts this year with tributaries serving Tianjin and Hebei and Shandong provinces - set to compete, it would seem, with CNOOC's planned Tianjin LNG terminal.

Acknowledging the west-east pipeline would have the 'right of way' in securing customers, since it is a critical national project, the market would ultimately grow large enough to accommodate multiple players and projects, Mr Fu argued.

'If you are talking about the potential market, it is very large, but if you are talking the available market, it's not as big.

'This is a catch-22 situation, but if you don't invest the money today, you will not have the market in the future.

'Current supply is sufficient to meet demand in the next three to five years, but it will fall short after five years. The west-east pipeline is very long, so each customer will only get a little of the supply and five to 10 years down the road it will not be enough.'

Yet, despite an apparent commitment to market economics, he argued that subsidies would be critical to the making of the business as it competed with far cheaper, but more polluting, coal. Users are being offered subsidies in order to persuade them to make the switch on environmental grounds, with Beijing pushing a sustainable development agenda.

'The amount of subsidy will vary according to the affordability of the city and how much social costs it can bear [in terms of pollution],' Mr Fu said.

PetroChina and CNOOC have suffered delayed purchase commitments from power producers due to wrangling with Beijing over permitted power tariffs, which must enable sufficient returns to justify considerable capital spending on facilities.

Elsewhere, CNOOC is pushing ahead into oil refining, petrochemical production and oil distribution, in a bid to reap the scale economies inherent in being an integrated operator.

Having been barred from operating a trading arm, the firm recently formed a joint venture with Sinopec's parent, China Petrochemical, to import crude oil. The venture will tighten its relationship with China Petrochemical, Asia's largest oil refiner, which must import most of its crude oil.

Together with Royal Dutch/Shell, CNOOC is also building a US$4.3 billion petrochemical complex across the border, at Daya Bay, as part of an initiative to bolster the production of basic petrochemicals to supply Pearl River Delta manufacturers.

The project, due to come on stream by the end of next year, will supply chemicals to dozens of plants planned as part of a cluster development. To aid such downstream operations, the company had submitted a proposal to build a 12 million-tonne-a-year oil refinery to produce petrol, diesel and other products, Mr Fu said.

The refinery will be one of the largest in the mainland and will cost about 14 billion yuan. It is due to be operational by as early as the end of 2007.

Biography

Fu Chengyu is chairman of red chip CNOOC and president of its parent firm China National Offshore Oil Corp. The 52-year-old has 29 years of experience in the mainland's oil industry. He received a Bachelor of Science degree in geology from the Northeast Petroleum Institute in China and a Master's degree in petroleum engineering from the University of Southern California in the United States. Prior to chairing CNOOC, he was chairman of CNOOC's sister company China Oilfield Services. In 2001, Mr Fu was made president and chief operating officer of CNOOC. Between 1995 and 1999, he worked for Phillips China as vice-president and general manager of the firm's Xijiang development project.