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Analysis: Conoco Spill Heightens Scrutiny Of Offshore China

Date: 20-Sep-11
Country: CHINA
Author: Judy Hua and Chen Aizhu

China is clamping down on offshore oil drillers after a spill by U.S. firm ConocoPhillips in Bohai Bay, requiring tighter controls in a campaign to beef up environmental protection standards ordered by Premier Wen Jiabao.

The leak from the Conoco-operated field, while disastrous, emitted less oil in three months than BP's Gulf of Mexico spewed out in a single day, but the response from Beijing has been swift and tough.

Firms are under orders to meet protection standards that some industry executives complain are nearly impossible. Approvals of environmental impact plans for new wells have slowed to a trickle as regulators pore over them more closely. Companies worry they will be barred from using the latest equipment if it hasn't been tested in China.

The first shot from Beijing came earlier this month, when it ordered the shutdown of the 168,000 barrels-per-day Penglai 19-3 oilfield, in which China's largest offshore oil producer, state run CNOOC Ltd, owns 51 percent.

CNOOC cut its output target, though the production loss is seen as having only a minor impact on supplies to the world's No.5 crude producer.

Longer term, executives say, there will be a real impact on firms drilling in Chinese waters who are suddenly seeing offshore China as a more risky and costly place to operate.

"After the incident, companies were told by the authorities to implement 'zero risk'. There is no such thing called zero risk -- human error, mechanical error always exists," said a Beijing-based foreign oil executive.

"But that means, from now on, everyone will need to pay more attention to the environment. The Chinese government is taking this opportunity to say we are also tough on the environment."

Already, according to a second Beijing-based foreign executive, authorities have slowed or put on hold Environmental Impact Assessment (EIA) approvals for new wells near the Penglai field in Bohai Bay, effectively slowing drilling in the area.

"New technologies that have not been used before in China, such as rigs, platform design and well-plan design, will likely be held back on safety concerns," said the second executive.

The oil executives all asked to remain anonymous due to the sensitivity of the case.

A CNOOC media official said CNOOC had not been notified about the slowdown in EIA approvals.

FUND, TRANSITION

The spill drew withering criticism of ConocoPhillips by Chinese media, forcing the oil major to apologize and to establish two funds to clean up and compensate for any damages arising from the incidents.

Described by China's marine authority as "the most serious marine ecological incident in China," the spill has polluted 5,500 square kilometers of water and leaked around 3,200 barrels of oil and oil-based mud.

Chinese industry experts said the shutdown order from the State Oceanic Administration after Conoco failed to seal off the leaks was in answer to both the public outcry, and to orders from the very top, the State Council.

"The SOA is under huge pressure from Premier Wen to act," said one Chinese state oil executive.

"It will be a transitional point for China's offshore oil industry -- China has reached a point that GDP is not the only barometer, it's time to aim for more balanced development."

China's marine authority is preparing to file a lawsuit against ConocoPhillips seeking compensation for the spill, but analysts say litigation could be lengthy.

Any compensation by Conoco and CNOOC Ltd would set a benchmark for future pollution cases, said a CNOOC official.

Already, the government has ordered thorough safety checks on all offshore oil activity between September and December and Wen has said the government would strictly control new petrochemical projects around Bohai Bay.

Companies were also told to re-apply for certification for new equipment used in their operations, or even for change of minor equipment for repair works, said the first foreign executive.

"It definitely means higher risk and higher cost for foreign companies," said the Chinese oil executive.

ConocoPhillips is one of the handful of international oil majors that operate in offshore China, where other investors are mostly independents such as BG Group, Anadarko, Roc Oil and Husky Energy.

CONOCO EASY TARGET?

Industry officials have argued that if the spill had been caused by a state-run company rather than a foreign firm, the response from authorities would been slower and less harsh.

"The whole thing was very frustrating. And it was so messy," said one executive with an international oil major. A flood of reports in local media, some not well-researched, only complicated things further, the official said.

The incident was first revealed by China's twitter-like microblogs, but companies and the regulator did not make it public for a month. State media have been accusing ConocoPhillips' China operation of "delays, negligence, cover-ups and cheating."

Analysts say China should seize the opportunity to revamp and tighten regulations and establish a mechanism to handle future spills.

"Oil companies are profit driven. It is necessary for the government to have clear policy signals and a clear mechanism so that oil companies can expect what situation they will face and what punishment they will have after an oil spill," said Li Yan, who heads up climate and energy issues for Greenpeace in Beijing.

China has witnessed an increasing number of industrial pollution disasters over the past decade. Despite devastating results, state-owned companies often manage to pay relatively little in compensation.

Last year, an explosion of two crude oil pipelines in the northeastern port of Dalian triggered a major offshore oil spill. The government said about 1,500 metric tons (10,950 barrels) of oil had spilled into the sea, though Greenpeace estimated as many as 60,000 tons (438,000 barrels) of heavy crude oil could have leaked into Bohai Bay.

CNPC, the owner of the pipelines, has said no compensation plan has yet been agreed, local media has reported.

The ConocoPhillips spill has raised the bar for both foreign and domestic firms, analysts say.

"This incident is a landmark. If a state company like CNPC or CNOOC has another oil spill, it will be treated like ConocoPhillips and will be punished based on the new standards set this time," said Lin Boqiang, director of the Center for Chinese Energy Economics Research in Xiamen University.

PRODUCTION LOSS

It is unclear how long the Penglai field will stay shut. A closure until the end of the year would mean about 18 million barrels of crude production lost, equivalent to around 1 percent of China's total crude output, or four days of imports.

"Offshore oil production is a big driver of China's domestic crude output growth," said Hawaii-based Kang Wu, senior advisor at Facts Global Energy.

"We expect China's domestic crude output to keep growing this year, but at a much slower pace than last year after this oil spill."

If the oilfield remains shut until the end of the year, domestic crude oil production growth was likely to stand at 50,000 bpd, half the previous forecast of 100,000 bpd, he said.

China's domestic crude oil production rose nearly 7 percent from the previous year to 4.06 million bpd in 2010.

(Editing by Brian Rhoads and Michael Urquhart)

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