China Oil Play That Doesn’t Depend on the Middle East

by Robert Hsu | February 4, 2011 4:00 am

China National Offshore Oil Corporation (NYSE: CEO[1]) was my pick[2] for InvestorPlace’s Top 10 Stocks for 2011[3]. CNOOC started the new year off strong, climbing to an all-time high of $250 in mid-January. And while shares have pulled back recently, I remain very bullish on the China oil stock as we go forward this year.

Of course, there are the tensions in the Middle East, which are causing oil prices to rise, and oil stocks to follow suit. But there are many more important factors driving China’s largest offshore energy producer.

As you likely know, China has had an insatiable demand for oil since the Asian giant’s economy started accelerating 10 years ago. And as we stepped into the 21st century, China’s oil self-sufficiency has been left in the past. Nearly 50% of China’s current oil consumption is imported from other countries.

In order to satisfy its rapidly rising demand for oil, CNOOC is snapping up assets globally, and the company has an aggressive acquisition plan for the near-term future. CNOOC plans to invest some $150 billion in the next five years to increase production volumes, mostly in offshore projects, aiming to produce an additional 50 million tons of oil and gas from overseas fields by 2020. Last year, the company spent a bit over $8 billion on overseas assets, as its domestic oil and gas production surpassed 51 million tons.

The biggest (and most bullish) acquisition of last year was CNOOC’s taking of a one-third stake in Texas shale oil and gas prospect owned by Chesapeake Energy (NYSE: CHK[4]) for a bit over $1 billion in cash and $1 billion in funding for Chesapeake’s share of drilling and completion costs.

In that acquisition, Chesapeake will remain the owner/operator of the project, which could produce the equivalent of up to 500,000 barrels of oil a day in the next decade. But CNOOC will massively benefit, as the partnership should give CNOOC the know-how to develop rich, but difficult to exploit, oil and gas deposits in China as Chesapeake is one of the pioneers in applying new drilling technologies to release oil and gas trapped in shale.

And then, more recently, CNOOC has been looking into additional cooperative agreements with Chesapeake, inking a second deal worth about $1.3 billion deal that gives CNOOC a 33% interest in Chesapeake’s leasehold acres in northeast Colorado and southeast Wyoming. The deal should close sometime in the next quarter.

Essentially, in exchange for a minority share in these projects, Chinese money will largely fund the cost of developing reserves that will actually enhance American energy security. I think this is a win-win for all parties involved and the deals are consistent with what the U.S. government has said they would like to see Chinese energy companies do.

You see, in the United States, there is an oversupply in the natural gas market due to the new drilling techniques, but that is not the case in China where energy use rises faster. Natural gas is an industrial fuel, as well as a key input for the chemical industry. CNOOC is looking to expand its natural gas production in China dramatically, which is one reason for the acquisition.

Overall, CNOOC remains the best-managed way to take advantage of the massive Chinese demand for oil, as well as rising oil and gasoline prices around the world.

Robert Hsu[5] is the editor of the China Strategy and Asia Edge newsletters. As of this writing, Robert was recommending CEO to his paid newsletter subscribers.

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