Diving Into Deepwater With CPC-Husky Venture

BMI View : Taiwan is set to undertake deepwater exploration after state-owned CPC Corporation and Husky Energy reached an agreement to cooperat e on projects off the south - west ern coast of Taiwan in the South China Sea. Any discoveries would serve as a boost to Taiwan ' s bleak upstream outlook significantly . Successes would also confirm the resource potential of the eastern South China Sea, wh ere China - led by CNC - is actively stepping up its exploration efforts.

On December 18 2012, CPC Corporation , Taiwan ' s state-owned oil company, signed an agreement with Canadian firm Husky Energy to cooperate in deepwater activities offshore Taiwan. According to CPC ' s official statement, the two companies will cooperate to carry out work in the Tainan Basin, off the south - west coast of Kaoshiung in the South China Sea.

This cooperation will take place in three stages - seismic studies, exploration and appraisal, and development if applicable - over a seven-year timeframe . CPC will initially hold a 25% working interest, which will double if commercially viable quantities of hydrocarbons are found. Husky will hold the remaining share.

This will be CPC ' s first venture into the deepwater, which it described in its official statement as a ' high technology, high investment and high risk ' new play for the company. Husky has been specifically chosen for its deepwater expertise, especially in the South Chi na Sea. The Canadian firm is currently developing the Liwan 3-1 gas field southeast of Hong Kong, where China ' s largest known offshore gas find of at least 112bn cubic metres (bcm) was made. Liwan 3-1 is expected to flow first gas in 2014. Husky ' s experience could be particularly useful, as CPC believes that the deepwater acreage it is eyeing could have similar geological properties - and hydrocarbon s potential - as Liwan 3-1.

Deepwater Drive For Gas

Taiwan is a marginal producer of both oil and gas. Domestic crude oil (including natural gas and other liquids) production has remained stagnant at an unimpressive 830 barrels per day (b/d) since 2004, while gas output has generally trended downwards since 2002 - having fallen nearly 70% from 0.93bcm in 2002 to 0.28bcm in 2011. The outlook for Taiwan ' s upstream is relatively bleak , as we do not expect a reversal of these trends based on current low levels of exploration.

Domestic consumption, particularly in gas, will continue to rise in tandem with economic growth. While th e increase in both oil and gas demand is not as spectacular as it is in regional giants such as China and India, gas consumption is still expected to increase by nearly 30% between 2011 and 2021. Despite its relatively small size, Taiwan ranks among the world ' s largest liquefied natural gas ( LNG ) importers and its gas import bill is set to rise given the dire levels of production.

Feeding Domestic Needs
Taiwan's Gas Production, Consumption & Net Import Requirement (bcm)

Deepwater exploration could help shore up Taiwan ' s small resource base. CPC hails its cooperation agreement with Husky Energy as ushering in a new chapter for the company as it will be its first deepwater venture. If exploration produces a find lik e the Liwan gas field s , wh ere peak production is expected to hit 3.0bcm per year, it could multiply Taiwan ' s domestic gas production tenfold - or meet about a third of its current gas consumption needs.

Eye On The South China Sea

CPC and Husky's venture will be interesting to observe, not just because of the possible implications for Taiwan's energy security, but also because success would confirm the resource potential of the northern belt of the South China Sea. China's state-owned China National Offshore Oil Corporation (CNC) is eyeing deepwater plays in these waters and has opened up 18 of its eastern South China Sea licences (which lies southwest of Taiwan) to foreign participation in the hope of drawing companies with the expertise it lacks to develop resources in these areas ( see our online service, August 29 2012, ' Production Ambitions Meet Security Risk Head-On ').

China's reaction to this CPC-Husky venture will be interesting to watch. With a claim over Taiwanese sovereignty, CPC's independent overtures to Husky could invite some opposition if nationalistic elements within China insist that CPC - and the Taiwanese government by association - does not have the sovereign right to award licensing rights to waters that Beijing also claims as its own.

At present, Beijing has been silent on the matter: at the time of writing, China's official mouthpieces - People's Daily and Xinhua News Network - had yet to comment on CPC's agreement. It would be bad political publicity for Beijing - as it attempts to win over the Taiwanese public - if it were to be depicted as a big bully denying energy sufficiency to the latter.

According to the Wall Street Journal, CPC is due to officially enter into a 50-50 joint venture (JV) with CNC to prospect for natural gas in deepwater plays in the Taiwan Straits in late 2013. It has been working with CNC in shallow water exploration since the late 2000s - albeit without much success. Political incentives to improve cross-straits relations are likely to drive this venture ahead and would further boost Taiwan's fledgling deepwater efforts, so long as there is no unexpected outbreak of political hostility.

This article is tagged to:
Sector: Oil & Gas
Geography: Taiwan

Related products in our Store...

Check out our most popular reports below or view more in our store