CNOOC's CBM Endeavor - Analyst Blog

China National Offshore Oil Corporation (or CNOOC Group), the parent company of CNOOC Ltd. (CEO), is heading toward an agreement to acquire 50% interest in China United Coal Bed Methane Company Limited (“CUCMB”) for 1.2 billion yuan ($181.2 million). The move reflects the group's endeavor to concentrate more on unconventional gas resources.

CUCMB, which was a 50:50 joint venture company between China National Petroleum Corp. (“CNPC”) and China Coal, has 27 coal bed methane (CBM) gas blocks with proven reserves of around 50 billion cubic meters. Coal bed methane or coal bed gas is a form of natural gas extracted from coal beds. Total acreage possessed by CUCMB is around 20,151 square kilometers, including 14 blocks or 15,915 square kilometers under collaboration with foreign investors.

In 2009, CNPC has departed from the joint venture and since then CUCMB is encountering financial crisis. Presently, China Coal holds 100% interest of the CBM producer. The fund from CNOOC will likely increase annual output of China CBM to 3–5 billion cubic meters by the end of 2015.

One of the largest independent oil and gas exploration and production companies of the world, CNOOC is a new entrant in the CBM market. The company is taking efforts to fortify its natural gas businesses and this acquisition marks a part of the process.

CNOOC's plan to buy half of the exploration rights in five Australian coal seam gas blocks from Exoma Energy Ltd. for A$50 million ($50.46 million) as well as its acquisition of 3.6 million tons of liquefied natural gas (LNG) per year for 20 years from BG Group Plc's Queensland Curtis export plant in Australia are cases in point. Australia has rich deposits where it is known as coal seam gas.

The group's coal bed methane venture is gaining momentum. It also intends to use unconventional gas resourcesto facilitate regional clients in the northern province of Shanxi with pipeline gas, compressed natural gas, or LNG.

Likewise, China Petroleum & Chemical Corporation or Sinopec (SNP), the second largest natural gas producer also plans to boost its unconventional energy output to five million tons of oil and gas equivalent, equal to five billion cubic meters of gas.

We maintain our long-term ‘Outperform' recommendation for CNOOC ADRs owing to its solid balance sheet, premium assets portfolio, excellent execution strategy, unique position as a pure oil player and potential transactions in the merger and acquisition space.