CHINA/ENERGY: PETROCHINA ANNOUNCES MAJOR BOOST TO CHINA'S

UNCLAS SECTION 01 OF 02 BEIJING 003083 SIPDIS SIPDIS SENSITIVE STATE FOR EAP/CM PSECOR, GWARD AND EEB/ESC SIMONS, HAYMOND, WECKER DOE OEA FOR CUTLER, NAKANO TREASURY FOR OASIA DOHNER, CUSHMAN USDOC FOR 4420/ITA/MAC/CEA/MCQUEEN USTR FOR BHATIA/STRATFORD/WINTER/ALTBACH/MCCARTIN E.O. 12958: N/A TAGS: ECON ENRG EINV EPET EFIN CH SUBJECT: CHINA/ENERGY: PETROCHINA ANNOUNCES MAJOR BOOST TO CHINA'S OIL RESERVES -------------- SUMMARY -------------- ¶1. (SBU) China's largest oil producer, PetroChina, announced a major oil discovery in the Bohai Bay (water near Beijing-Tianjin) last week. The oil is considered to be of high quality and is easily recoverable, according to our contacts. Although estimated by the company to be around 7 billion barrels, China's rising oil consumption will easily absorb the domestic production gains created by the find. News of the discovery increased the company's share value by some 14 percent, making PetroChina the third highest valued energy company in the world. The company is planning an additional stock listing in Shanghai in the near future, and the boost in valuation will likely be reflected in higher proceeds. The anticipated infusion of cash potentially positions the company to launch an overseas acquisition effort at some time in the future. End Summary. -------------- -------------- PETROCHINA ANNOUNCES LARGE BOHAI BAY OIL DISCOVERY... -------------- -------------- ¶2. (SBU) China's largest oil producer, PetroChina, announced on May 4 a major oil discovery in the Bohai Bay Basin. The company stated in its press release that the Jidong Nanbao Oilfield, located off of the Hebei Province port city of Tangshan, holds reserves of more than 1 billion tons, or 7 plus billion barrels. Reports suggest the oil's quality is high and the projected costs of its production relatively low. An investment bank energy analyst told us that the oil field should be producing about 160,000 barrels per day by 2010. The analyst acknowledged rumors we had heard that the field's geology may be more complicated than is being admitted by PetroChina (potentially affecting the economic recoverability of the oil),but noted that the general consensus of experts is that the field will be a large producer. -------------- -------------- ...DRIVING THE COMPANY'S MARKET VALUE PAST BP, GAZPROM -------------- -------------- ¶3. (SBU) PetroChina's market value grew significantly as its stock moved upward 14 percent on the day of the announcement. The international financial press noted that the single day increase in PetroChina's stock bumped it up from the fifth to the third most valuable publicly traded oil company in the world, worth an estimated USD 233 billion. The top five are now: ExxonMobil, Royal Dutch Shell, PetroChina, Gazprom, and British Petroleum. Our investment bank contacts all listed PetroChina as a "buy" in notes distributed to clients over the weekend, claiming the double-digit share price increase is justified by the discovery and by broader underweighting of energy stocks in institutional Asian market portfolios. -------------- --- THE NEW FIELD DRIVES CHINA'S OIL RESERVES HIGHER -------------- --- ¶4. (SBU) At the end of 2006, China had 24.5 billion barrels of oil reserves, according to a recent study by a renowned international energy consultancy. This ranked China fifteenth worldwide in total oil reserves. Utilizing the same oil reserves formulation used by the energy consultancy (see note below for more on this),the Bohai Bay find will add an additional 5 billion barrels to China's reserves. This addition moves China past Libya and Brazil on the list, absent significant discoveries or production output changes in other countries, but is not large enough to move China past Qatar (34.5 billion barrels),Nigeria (36.2 billion barrels),or Kazakhstan (41.4 billion barrels) into the top ten of the reserve list. The discovery will likely generate more calls for offshore exploration in the Bohai Bay and beyond. Such a call was made in the local press by a senior researcher with the Ministry of Land Resources in April as he encouraged greater deep sea exploration beyond the Bohai Bay basin (where more than 80 percent of proven offshore reserves are located). ¶5. (SBU) Note: The energy consultancy reserve figure is based upon a standard "proved plus probable" formulation that implies a 50 percent probability of recovering at least 5 billion barrels of the announced 7 billion barrel find. There are two kinds of reserves: proved and unproved. Proved reserves have a 90 percent probability of recovery. Among unproved reserves is a sub-category called "probable," which is those unproved reserves that have a 50 percent BEIJING 00003083 002 OF 002 chance or greater of recovery. The "proved plus probable" formulation therefore counts in reserve figures the overall quantity that has a 50 percent or greater chance of recovery. See www.spe.org for more on these definitions. End Note. -------------- -------------- DESPITE FIND, ENERGY INDEPENDENCE REMAINS A PIPE DREAM -------------- -------------- ¶6. (SBU) Local Chinese and English media have hailed the Bohai Bay find as another significant step towards energy independence. National Development and Reform Commission (NDRC) Vice-Chairman Chen Deming, speaking in Saudi Arabia over the weekend, promoted China's potential to increase its oil and natural gas production, according to the China Daily. While the new find represents such an opportunity in the oil sector, its significance in the face of China's rising consumption will be largely muted. As noted above, analysts expect the new Bohai Bay field to produce 160,000 barrels per day by 2010. This will represent at best only about five percent of China's daily needs by 2010, as computed against a conservative estimate of 8 million barrels per day consumed. (Note: China is on track to consume well over 7 million barrels per day in 2007, according to international energy analysts. End Note.) -------------- COMMENT: DISCOVERY COULD BOOST STOCK PROCEEDS -------------- ¶7. (SBU) An even more significant development may be the capital infusion into PetroChina resulting from its stock price increase. The company already has shares traded in New York and Hong Kong. A Chinese media report recently stated that PetroChina is awaiting approval for a further listing in Shanghai, valued at approximately USD 4 billion. The higher valuation resulting from the Bohai discovery could boost the proceeds of that listing significantly. With extra cash in hand, the firm could potentially be emboldened to launch an acquisition effort abroad similar to China National Overseas Oil Company's (CNOOC's) aborted effort to acquire Unocal in ¶2005. RANDT