Bali blast raises oil security doubts: China energy watch

Bali blast raises oil security doubts: China energy watch

Xu Yihe, Dow Jones, Singapore

Three weeks ago in Bali, China announced it would spend US$2
billion on acquiring Indonesian hydrocarbon reserves and making
other investments in the country's energy sector.

Now, the weekend bomb blast in the same venue is ringing alarm
bells at Chinese energy companies, and it has raised questions
about future oil and gas investment projects in Indonesia.

Adding to their worries are concerns that oil, gas and power
facilities could be the next targets for terror attack in
Indonesia.

Any such attacks would definitely dampen the enthusiasm of
Chinese companies seeking overseas oil and gas assets, pushing
them to turn their attention to Africa or other areas, said a
Beijing-based energy analyst.

"Nobody would want to expose their operations to terror
attacks, which could lead to energy supply disruption and sharply
higher energy prices," he said, adding that Chinese energy
companies should avoid high risk areas like Indonesia despite the
attraction of its energy resources.

An official with PetroChina Co., had similar views, saying
that safety operation in a peaceful environment should be one of
the key parameters for China in selecting overseas energy
investment projects.

"We should be more cautious in acquiring Indonesia energy
assets," he said.

Chinese companies feel exposed not least because they now
control 12 percent of Indonesia's total crude oil production.

And their concerns have been heightened by a warning from
Jakarta. "There are indications that the energy centers may
possibly be targeted by terrorists," top security minister Susilo
Bambang Yudhoyono said Monday.

The safety issues in Indonesia could lead Chinese oil and gas
companies to turn their attention to Africa in their search for
assets to help offset China's growing energy deficit, the Beijing
analyst said.

This is because Africa is one of the few places with the
potential hydrocarbon reserves and convenient logistics for
shipping oil to China, he said.

That said, China's existing energy assets in Africa aren't in
the safest of locations.

In early October, China Petroleum & Chemical Corp., or Sinopec
Corp. signed an agreement with Algerian national oil company
Sonatrach to invest $525 million in developing Algeria's
Zarzartine oilfield.

While the stability of the government in Algeria isn't a big
concern, the country has been battered by terror attacks for
years.

And Sudan, where PetroChina's parent China National Petroleum
Corp. owns a 40 percent stake in the Unity Field in the south,
has been suffering from civil war for decades.

CNPC's Sudan field produces about 11 million tons of crude oil
a year.

But China is in a difficult spot, as buying into overseas oil
and gas reserves is one of the country's key energy policies.

It wants to acquire foreign assets to offset domestic energy
shortfalls, to build up national petroleum reserves to ensure
security of supply, and to insulate it from price spikes.

In late October, China sent a top government energy delegation
to Indonesia to discuss details of China's energy assets
acquisitions there.

Led by Zeng Peiyan, the minister of State Development Planning
Commission, China's highest economic planning body, the
delegation signed an impressive slew of agreements, committing it
to more than $2 billion of investments in Indonesian energy
projects in the next three years.

One of the deals is the acquisition of a 12.5% stake from BP
PLC in Indonesia's Tangguh gas fields by CNOOC Ltd.

CNOOC acquired the stake for $275 million as part of its deal
to buy $8.5 billion of liquefied natural gas over 25 years from
the Tangguh facility. About 2.5 million tons of LNG will be
shipped to China's Fujian province each year, starting in 2007.

For now though, CNOOC doesn't seem much concerned about
tensions inside Indonesia.

This is despite several separatist and ethic conflicts, like
those in Aceh, Northern Sumatra, where violence and lack of
security forced Exxon Mobil Corp. to shut down production for
five months last year.

"Indonesia is a stable place for oil and gas exploration and
production, despite a few incidents," Mark Qiu, CNOOC's chief
financial officer, told Dow Jones Newswires in a phone interview
Tuesday.

"All our operations are offshore...under strict and strong
security...it (Bali) is two-hours air flight away," he said.

He said Indonesia's government has sent military units to
tighten security near its fields, and staff had been placed on
alert.

Also during the Bali visit, PetroChina agreed to invest $1.7
billion to build a gas pipeline linking the islands of Java and
Kalimantan.

Other Chinese commitments made in Bali include building four
power plants in Sumatra and Kalimantan.

The deals followed PetroChina's April 2002 purchase for $216
million of 106 million barrels of proven oil reserves and 57
million barrels of probable crude reserves from Devon Energy in
Indonesia.

That came fast on the heels of CNOOC's $585 million purchase
of 360 million barrels of proven Indonesian hydrocarbon reserves
from Spain's Repsol-YPF SA.