Oil and gas players shrug off Chinese naval drills
- Paul Garve - From: The Australian; July 04, 2011
China's navy has been carrying out highly publicised naval exercises along the disputed maritime border it shares with Vietnam, and the country's state-owned newspapers have been running evocative editorials warning that it will "show no mercy" should Vietnam wish to start a war in the South China Sea. At the heart of the escalating tensions is the increasing excitement about the oil and gas prospects in the water off Vietnam's coastline, where a number of Australian companies are active.
For those Australian companies with prospects in and around those waters, the tensions, unsettling as they are, are nevertheless a ringing endorsement of the potential that attracted them to Vietnam in the first place.
Australian oil and gas stalwarts Santos and Origin Energy are both exploring there, while junior player Neon Energy is sitting on two of the more interesting pieces of acreage in the region. All the companies are aware of the tensions but don't allow them to slow their exploration efforts. The aggressive rhetoric between China and Vietnam comes at a sensitive time, particularly for Neon, which is sitting on oil and gas prospects that could transform the company.
Neon is on the hunt for a joint venture partner that will carry the bulk of the cost of testing some of its best targets.
So far, the tensions appear to have done little to dampen third-party interest in the acreage. Indeed, China wouldn't be so interested in the territory were its oil and gas prospects not so attractive.
Territorial disputes between China and its neighbours in the South China Sea are nothing new, with the boundaries around the potentially oil-rich Spratly Islands north of Malaysia disputed for decades. The latest tensions, however, revolve around a relatively new area.
The latest flare-up between China and Vietnam began just before 6am on May 26 in the waters just southeast of the blocks held by Neon and Origin and northeast of Santos's 50 per cent owned Block 123. The Binh Minh 2, a survey ship owned by Vietnam's state-owned energy giant PetroVietnam, was carrying out a seismic survey in the waters when it was reportedly rushed by three Chinese patrol ships.
A number of seismic cables attached to the Binh Minh 2 were damaged in the incident. Relations between the two countries have been strained ever since.
Chinese media has been releasing details of recent naval exercises near the Vietnamese waters, including mine sweeping and missile tests, as well as beach landings at Hainan island.
Equally provocative was an editorial in the Chinese state-owned Global Times, which said: "If Vietnam wishes to create a war in the South China Sea, China will resolutely keep them company. China has the absolute might to crush the naval fleets sent from Vietnam. China will show no mercy to its rival due to 'global impact' concerns."
Against that backdrop is Neon's hunt for joint venture partners for its two Vietnamese licences, Block 105 and Block 120.
While Block 105 is not in dispute, Neon managing director Ken Charminsky estimates that the eastern one-fifth of Block 120 falls in the area of the recent controversy. Neon and its existing partner in the project, private group Kris Energy, have focused all their efforts to date in the western half of the block, away from the disputed area.
Independent consultant Netherland Sewell & Associates has identified a dozen oil leads in the block capable of hosting up to an impressive combined total of 7.9 billion barrels of oil, with a most likely estimate of 2.7 billion barrels. That is a tremendous potential target, particularly for a junior Perth-based explorer such as Neon.
Block 105 is just as enticing, with NSA identifying seven prospects it estimated could host 6.3 trillion cubic feet of gas and 46.3 million barrels of condensate on a most likely basis, and a possible 21 trillion cubic feet of gas and 177 million barrels of condensate.
The highest priority target, Ca Lang, has a most likely target of 461 million barrels and a best case estimate of 1.3 billion barrels.
"For a company of our size, when you think about the impact a discovery of that magnitude would have for us, even a large multinational could be pleased with that," Charminsky says from London.
Southern Cross Equities analyst Johan Hedstrom rates the prospects a 10-20 per cent chance of success and says just one success could be worth between 57c and $1.70 a Neon share.
Neon, which already operates some small but profitable oilfields in the US, trades around 39.5c a share.
"Companies like Woodside, Santos and Oil Search would love to have such potential in their portfolios, which does raise the risk of a takeover for Neon," Hedstrom says.
"Australian companies are probably not the main threat, but big companies like Exxon Mobil, which is drilling next door, would probably consider taking out Neon rather than doing a farm-in for 50 per cent."
The possible upside means there has already been a strong stream of inquiries from larger oil and gas players interested in funding the bulk of drilling costs on the blocks in return for an interest.
Despite or maybe because of the China controversy, Neon has had dozens of parties at the blocks' online data room and a handful of majors at the physical data rooms that have recently opened in Singapore and Perth. Neon is aiming to finalise a deal in six months and start drilling early next year.
Many of the world's oil and gas majors are already active in Vietnam, such as Exxon (which is preparing to drill a well on the block immediately north of Neon's Block 120), Chevron, Total and Gazprom.
Malaysian oil and gas giant Petronas last week announced a new oil discovery at its Diamond field off southern Vietnam, which is flowing at 5200 barrels of oil a day.
Origin Energy, which owns and operates Block 121, immediately south of Neon's Block 120, is pushing ahead with its work programs in Vietnam.
Santos has previously said it planned to drill the Tuy Hoa prospect on Block 123 in early 2011, but there has been no update on this plan.
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