CNOOC silent on output at spill site

PUBLISHED : Monday, 18 March, 2013, 12:00am
UPDATED : Monday, 18 March, 2013, 2:30am

Nineteen months after CNOOC announced the shutdown of its Penglai 19-3 oilfield investors have been told that Beijing has approved production to resume.

Beijing ordered the shutdown of the oilfield - the nation's largest offshore facility - because of oil spills.

Nevertheless, the field never completely shut down and production was ramped up in the second quarter of last year, issues that CNOOC, the mainland's dominant offshore oil and gas producer, would not publicly confirm or explain.

According to public filings to the US Securities and Exchange Commission by ConocoPhillips, CNOOC's United States-based partner in the field, output grew from 40,000 barrels per day in the first quarter last year to 72,000 barrels in the second quarter and 90,000 barrels in the third.

"Given that the field is already producing more than 90,000 barrels per day, this announcement is more 'symbolic' than material," a Sanford C. Bernstein research report of CNOOC's statement about the field's resumption said.

The field is in the Bohai Bay, off the coast of northern China.

State-controlled CNOOC said on February 17 that the State Oceanic Administration (SOA) announced on its website that the field's operator, ConocoPhillips, had obtained approvals on the field's revised development and production plan and environmental impact assessment as required by Beijing following the oil spills.

The spills, which began in June 2011, resulted in the release of about 700 barrels of oil and 2,500 barrels of mineral oil and oil-based slurry on to the seafloor, ConocoPhillips said.

The SOA ordered two platforms to stop production in July that year, and for the entire field to be shut down two months later.

Last April, ConocoPhillips agreed to pay 1.2 billion yuan (HK$1.48 billion) and CNOOC agreed to pay 480 million yuan in compensation for damage to fisheries and the environment caused by the spills.

Prior to the spills, the field's production capacity amounted to about 6 per cent of CNOOC's annual output.

A revised field development and production plan was submitted to the National Development and Reform Commission in November 2011, and an updated environment impact assessment was presented a year ago, ConocoPhillips said.

The company added in its third-quarter results filing that the environmental assessment was approved in October last year.

CNOOC did not mention such approval until February 17.

ConocoPhillips said the field's daily production was ramped up "under an approved interim operations resumption plan". It added that it expected output would be fairly level throughout last year's fourth quarter.

CNOOC was asked three times - in August during the announcement of its interim results, in October when third-quarter operational figures were updated and again last month at a business strategy preview - when production would resume at the field. On each occasion, CNOOC management said resumption was pending approvals of the field's development and production plan and environmental assessment.

Asked why CNOOC did not disclose the field's resumption and rising production while its partner did, a spokesman said: "We disclose information following our disclosure principles. All of CNOOC's disclosures meet compliance requirements."

According to a new disclosure law that took effect on January 1, Hong Kong-listed firms and their directors could face fines of up to HK$8 million if they fail to disclose major corporate development information. The legislation was designed to put market transparency in Hong Kong on par with international standards.

Asked if CNOOC could comment on the pace of production resumption and whether the field's output could return to pre-oil spills levels, the spokesman said: "Production of the Penglai 19-3 oilfield after resumption will be known over a period of time."

Sanford C. Bernstein said the field's new peak output would likely only reach 100,000 barrels a day under the revised production plan approved by Beijing, down from 120,000 barrels prior to the oil spills.

CNOOC's spokesman declined to comment.

An analyst who covers CNOOC said the state-controlled firm's minimal disclosure was probably dictated by higher authorities in Beijing, since the oil spills affected the livelihood of many fishermen and had become a social and political matter.

"The situation is quite complex. You have the State Oceanic Administration, the National Development and Reform Commission, and the Ministry of Environmental Protection standing over the remedial actions," he said.

"Their primary focus is to ensure social stability, safe production, and environmental protection.

"It is natural that they do not want publicity about the field's production resumption until safe production is well-assured after a relatively long period of time. Disclosure of information to CNOOC shareholders is well down their list."

The analyst said it was not technically possible to completely stop production at an oilfield like Penglai 19-3 even if the government ordered a shutdown. That was because an output halt in the field's high-temperature, high-pressure environment would damage the undersea oil reservoir and result in lower future production.

According to the Sanford C. Bernstein report, the field was producing at the minimum rate of 20,000 barrels a day in last year's first-quarter - the lowest production rate before a gradual ramp-up took place.