Singapore (Platts)--18Sep2007

Chinese oil and gas companies, flush with cash this year, will continue
to hunt overseas for assets as well as seek foreign investment and expertise
to develop some of the recent major finds in the country, Standard & Poor's
said in a research report released Tuesday.

     The scope of exploration projects in China is seen widening, including
into fields previously considered uneconomical, and the development of the
natural gas sector is expected to pick up speed, S&P analysts said.

     Chinese economy grew at 11.5% in the first half of 2007. According to the
International Energy Agency, the country's petroleum demand will increase 6.9%
to 7.6 million b/d in 2007 from an estimated 7.2 million b/d in 2006.

     However, domestic oil production amounted to just 3.8 million b/d in
2006 and though Beijing remains optimistic that output will rise by 2.5% in
2007, it would be still far short of demand, S&P said. In 2006, the country
imported 2.8 million b/d of oil, about 47% of its total oil demand.

     Meanwhile, the growing gap between China's oil supply and demand has
helped pump up the earnings of the big three oil players, S&P said. Financial
performances of Sinopec, CNOOC Limited and PetroChina "should remain strong
this year, given favorable price volatility, and this well help to fund their
search for new supply channels," the report said.

     CITIC RESOURCES MAJOR NEW BUYER

     But the three will have to get used to a smaller share of the pie, S&P
said, as a result of the recent emergence of a fourth player, CITIC Resources
Holdings, a subsidiary of the state-owned CITIC Group. "CITIC Resources has
already been pounding the acquisition train, snapping up an oil field in
Kazakhstan. Although its production capacity still lags far behind that of the
big three, Standard & Poor's expects the company to play an important role in
China's overall energy security strategy," the ratings agency said.

     Meanwhile, key local development projects that will be looking for
foreign investment and expertise include PetroChina's major Jidong oil find
off Bohai Bay announced in March 2007, S&P said. The Jidong field contains
probable oil reserves of 2.2 billion barrels of oil equivalent, and is
expected to produce just over 200,000 b/d within three years.
 
     CNOOC has also discovered new oil and gas reserves at Bohai Bay. Its
Bozhong well produced 1,600 b/d of oil and 283,200 cu m (close to 10,000 Mcf)
of gas per day in initial testing, according to the company.

     Sinopec has begun drilling Asia's deepest exploration well -- the
Chuanke-1 -- in southwest Sichuan. It has a target depth of 8,875 meters
(29,117 feet) and will take almost two years to drill, S&P said, adding that
China has not been successful in drilling extremely deep test wells. 

     DOMESTIC FINDS NOT ENOUGH

     However, these discoveries will only quench some of the domestic thirst
for oil, S&P said. 

     CNPC has said it will increase investment in exploration by 25% to Yuan
250 billion ($32.2 billion) in 2007. It will target drilling in its overseas
projects and in eight domestic basins. CNOOC has said it would invest $2.6
billion in exploration in 2007, a 19% increase on the year. The company
expects to discover additional high-quality fields at Bohai Bay in the next
few years. 

     At the same time, the Chinese government is encouraging its national oil
companies to expand overseas by entering joint ventures, exploring and
developing untapped oil fields on their own, and acquiring existing
corporations, S&P said.

     In the past year or so, the three big oil and gas companies have been
fairly quiet in the overseas acquisition markets, mainly due to scant
opportunities and the steep valuation of assets, given the high oil price
environment, S&P said. 

     CITIC Resources, however, was an exception. It spent about $2 billion to
acquire an oil field in Kazakhstan, which S&P said was evidence of strong
government support. "It also highlights the government's strategy to
strengthen energy security by encouraging more national companies to secure
oil supplies overseas," the report concluded.

     GAS MARKET BOUND TO OPEN UP

     Meanwhile, Chinese demand for natural gas is rising fast as the 
government strives to increase consumption to 8% of the total energy use by
2010 from just over 3% in 2006. Gas consumption would grow at double-digit
rates for several years to come, accompanied by efforts to boost domestic
output, expand domestic and international pipelines, and build LNG import
terminals.

     China's domestic gas production is also rising rapidly because the major
companies have invested heavily to find and produce supplies, S&P said. At the
end of 2006, natural gas proven reserves stood at about 2.45 trillion cubic
meters (86.49 Tcf), almost the same level as at the end of 2005. Domestic
production, however, increased 17.2% from 58.6 billion cubic meters in 2006.
  
    Nonetheless, tight regulations on pricing continue to constrain the
further development of the natural gas sector. "This is especially true for
LNG importers because there's no mechanism in place for them to pass through
cost increases to consumers," S&P said.

     But the tight regulations may not last forever, S&P said, pointing to
China's first LNG terminal -- the Guangdong Dapeng LNG terminal in Shenzhen --
buying its first spot LNG cargo in April, just eight months after starting 
commercial operations in September 2006. Since then the operator has bought
five more spot cargoes to meet growing demand in its service area. 

     Local governments are said to have given subsidies to the gas offtakers,
which are power plants, to buy the supplies. S&P views these subsidies as
temporary, however, as the Chinese government plans to build up to 10 LNG
import terminals by 2010, with annual imports likely to rise to 30 million mt
from the current 3.7 million mt.

     "Standard & Poor's believes that the natural gas market will open up if
the government relaxes price controls to let consumers bear the cost
increases. Terminal operators would have greater opportunities to buy from the
spot market and domestic producers would be encouraged to pump more gas," the
research report said.