China should adopt more flexible policies for oil and natural gas exploration with foreign oil companies and give domestic companies more leeway in making cooperation decisions, said Ru Ke, former chief geologist of the China National Offshore Oil Corp.

At present, production sharing contracts (PSC) are the only model for cooperation between CNOOC, on behalf of the Chinese government, and its foreign counterparts in offshore oil and gas exploration and development.

However, said Ru, more arrangements such as farmout agreements and service contracts, which are widely accepted international practices, could be introduced to the domestic offshore petroleum sector.

A farmout agreement allows an owner that holds a working interest in an oil or gas lease to assign all or part of that interest to another party, which must meet certain conditions, often involving drilling.

Ru is a member of the Chinese People's Political Consultative Conference National Committee.

Under the current regulations governing offshore exploration, which were introduced in the early 1980s, foreign oil companies must use PSCs.

Such arrangements require the foreign parties to bear the entire exploration cost, while CNOOC takes a participating interest of at least 51 percent when a field is discovered and goes commercial.

The rules, though amended several times in recent years, are outdated in relation to conditions in China and the world, Ru said.

Using farmout agreements would give Chinese oil companies more options when choosing cooperation partners, particularly in mature offshore areas, he said.

Industry experts have pushed for regulatory changes since the oil leak in Bohai Bay in June, when US-based energy giant ConocoPhillips Co, the operator of an offshore oilfield, spilled more than 700 barrels of oil.

China is "no longer short of cash (and) changes ranging from the macro policies to specific schemes need a change", Ru said.

But he added that the PSC model, which is among the best options when it comes to risk-sharing, should remain the primary method regarding deepwater oil exploration, which has much higher risks than near-shore exploration activities.

Deepwater exploration in the South China Sea is a must for CNOOC, which needs to gain experience in operating deepwater projects and test its technology, Ru said.

In that sense, it's important that CNOOC should have more operating opportunities in deepwater projects, he said.

CNOOC will be an operator in the South China Sea 43/11 deepwater block, where BP PLC recently obtained approval from the Ministry of Commerce to farm.

Ru also suggested that the country expand its strategic petroleum reserves from the coastal area to inland regions to address energy security concerns.

China maintains a strategic oil reserve equivalent to 30 days of imports, compared with 90 days in some industrialized countries.

zhouyan@chinadaily.com.cn

(China Daily 03/08/2012 page16)