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More demanding tasks set to bring more income at COSL

Oil-drilling services firm says more complex operations will drive up average charges

PUBLISHED : Monday, 04 February, 2013, 12:00am
UPDATED : Monday, 04 February, 2013, 4:19am

The nation's dominant offshore oil-drilling services provider, China Oilfield Services Ltd (COSL), expects the basic drilling rate it charges its customers to be flat this year, even as its largest customer, CNOOC, is raising spending.

But the overall average fee of its services is expected to increase as the company handles more complex and technically challenging operation, such as deep-sea drilling and production of natural gas from coal seams or underground rock formations using unconventional methods.

Chief executive Li Yong said: "Our basic service rates are similar to those of last year. But since we can charge higher rates for our new service capacity, the overall average rate will go up somewhat."

Neil Beveridge, a senior analyst at Sanford Bernstein, said COSL's profit growth might decelerate in the next two years because of a slowdown in the rate of service capacity increases and a compression of profit margin because of a possible decline in the drilling rates of jack-up rigs.

COSL made a net profit of 3.83 billion yuan (HK$4.76 billion) in the first nine months of last year, 13.5 per cent higher year on year. The average profit estimate of analysts polled was 4.6 billion yuan for the whole of last year, and 5.33 billion yuan this year.

COSL's oil and gas producer customers, such as its sister firm CNOOC, which accounts for 60 per cent of its sales, are increasingly venturing into the exploitation of hard-to-extract oil and gas using unconventional methods. Growing output using conventional methods is increasingly difficult and costly, forcing producers to upgrade their technical capacity to ensure profit growth.

CNOOC, the country's dominant offshore oil and gas producer, said last week it planned to spend US$12 billion to US$14 billion this year to find and exploit new resources. This is 30 to 50 per cent higher than its estimated outlay of US$9.19 billion last year, and bodes well for the demand for COSL's services.

But as CNOOC's operation is becoming increasingly global, COSL faces more competition from bigger international rivals when bidding to serve overseas. COSL's chairman, Liu Jian, said the company was unlikely to bid for service contracts in the United States, where CNOOC has unconventional gas projects, because of the intense competition. "Our focus is on China's offshore market," he said. "This is where we have advantages."

COSL's chief financial officer, Li Feilong, said the firm had a 95 per cent share of the offshore drilling service market in China, almost 100 per cent of the seismic data collection market, and 60 per cent of the well services and the marine support and logistics market.

While not ruling out the possibility of co-operating with a rival in the US, Li said COSL had no plans to acquire a foreign rival to obtain unconventional drilling technology. "Technology is not a constraint for us," he said, as COSL had built up an inventory of skills in unconventional drilling through self-development.

Last month, COSL signed a memorandum of understanding with Sunshine Oilsands, which is developing a project to exploit oilsands in Canada. COSL will test its technology, currently deployed in Bohai Bay, on Sunshine's project.

Li Yong said COSL's technology might result in more energy-efficient steam generation and injection underground, so the cost to produce oil from oilsands could be cut.

Li Feilong said COSL had made important progress in its negotiations with Norwegian tax authorities over a tax dispute that the company had previously said could result in it having to pay 870 million yuan in taxes and penalties, although some items were still being contested.

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