China to Buy More Oil Rigs

China National Offshore Oil Corp's NYSE:CEO drilling subsidiary China Oilfield Services is actively planning new vessels to cope with higher demand offshore China, the company said in its annual strategy preview on Thursday.

Its total capital expenditure this year will range from CNY 4 to 5-B ($643-$804-M), similar to its planned budget for Y 2012.

About 62% of its capital expenditure this year will be focused mainly on construction of new vessels in its drilling services segment. The remainder will be geared towards well completions, geophysical and marine support and transport services, COSL said.

Spending on newbuild vessels includes the COSL Prospector semisubmersible rig capable of drilling in water depth of 1,500 meters. It is currently being constructed at Chinese yard CIMC Raffles HK:3899 in Yantai. In addition, COSL has commissioned two jack-up drilling rigs and a second 1,500 m semisubmersible rig. All the newbuilds are expected to be operational from 2-H of Y 2015 at the earliest, the company said.

The company currently operates over 30 vessels, including seven semisubmersibles.

COSL's capacity addition is proof that there is strong demand from activity in the South China Sea, Nomura Research said in a note Thursday.

"Although many people cast doubt on the deepwater progress of [the] South China Sea owing to geological uncertainties, technology gaps and sovereign disputes, demand does look very solid because [COSL is actively adding] new drilling capacity for this region," Nomura said.

The planned expansion comes after it purchased the 1,400 m Nanhai VIII semisubmersible rig for drilling work offshore China in September.

In the first quarter of last year, COSL also started operating the Haiyang Shiyou 981 deepwater semisubmersible rig. The rig is capable of drilling in water depth of 3,000 m and was the first such vessel commissioned by CNOOC. It drilled at least three deepwater wells in the South China Sea last year although CNOOC has not revealed the results of the drilling.

COSL said over 80% of its rig contracts for this year have been secured, with the total volume of work remaining steady from 2012.

For the six months ended June 2012, revenue offshore China made up 68% of COSL's total earnings.

CNOOC, which is COSL's largest customer, said Wednesday that its capital expenditure this year will rise by 31%-52% Y-Y to $12 to-14 billion.

Analysts at Bernstein Research said in a note Thursday that of this amount, CNOOC's domestic expenditure will be around $7.7-B– up 25% from 2012 but lower than the 35% growth seen over MY 2011-2012.

CNOOC plans to drill 140 exploration wells this year, the bulk of which will be offshore China. COSL said CNOOC's projected drilling plan secures its own work volume for the "foreseeable future."

CNOOC's chief financial officer, Zhong Hua, on Wednesday also highlighted the amount of work needed on existing fields offshore China, saying that despite 10 new domestic projects expected online this year, the company's output growth in Y 2013 would likely be just 2.3% Y-Y, and most of the increase would come from abroad.

"Clearly the underlying declines of the existing aging fields are so severe that they completely offset the contributions from the new smaller fields," Gordon Kwan, head of energy research at Mirae Asset Management, said in a report Thursday.