with Robert Hinkel, Chief Operating Officer Asia Pacific, Husky Oil China
Mr. Hinkel, let us begin with Husky’s South China Sea ace: Liwan 3-1. The company has called the field a landmark; and, indeed, this is the first deepwater development project in China. How did Husky manage to be the first in what appears to be a looming deepwater boom in this territory?
We first acquired the block in 2004. Husky was actively looking for opportunities in the South China Sea at the time, and we obtained interests in a number of blocks in both shallow and deep water. This block was one of the more prospective opportunities that we found.
But the central point, I believe, is that Husky made a firm decision earlier in the decade to build a material business in Asia over time. This is the implementation of that plan.
From a technical standpoint, how does Liwan 3-1 represent an innovative approach to the South Sea’s deepwater challenges by Husky’s specialist team and its partners at CNOOC?
The strong cooperation between Husky and CNOOC is unique aspect leading to the success of this venture. CNOOC is developing and operating the shallow-water section of the project, while Husky is developing the deepwater section. Although each company has staff members embedded into each other’s respective teams, the broader responsibilities are allocated in the aforementioned fashion. This is a model of cooperation that I, at least, have never encountered before, but is proving very successful.
The arrangement allows each of us to focus on critical project elements that we do best. Husky has deepwater expertise here, the right talent in place, and the skillset to coordinate the manufacture of equipment all around the world for a deepwater project which, by the way, is truly a complex undertaking. From this perspective, Husky is quite well suited for the work before us. Further, we are able to drill wells for the project in less than 20 days, and complete wells with a frac-pack in another 10-15 days. Our execution has become very, very efficient, and our skillset has continually improved.
At the same time, CNOOC’s skillset in developing deepwater projects, constructing deepwater platforms, and fabricating equipment and facilities in China has been brought to bear on the project in shallow water. This has allowed us to jointly move this project from the discovery stage in 2006 to estimated first production in 2013, making this one of the fastest deepwater gas projects from discovery to production ever seen in the world. In terms of technical challenges: the weather conditions in the South China Sea are fairly benign for most of the year, but, as many of the people that live in the region know, there are periods – particularly late in the year – when the typhoons pass through with frequency and can prove quite disruptive. This is an issue that we have had to deal with both in drilling and installation planning.
Another challenge is that, in the shallow water section of the project, there is a long distance between the shallow water platform and the shore: 270Km. That is quite a distance to traverse! CNOOC and Husky therefore decided to bring the project onshore at Gaolan.
Incidentally, I would also mention that Gaolan, which is located near Zhuhai, will become a major energy hub for the Pearl River Basin. In addition to our facilities that are being built there for 3-1 and our nearby fields, there will eventually be LNG facilities onsite, as well as LPG export and import facilities. Gaolan is truly becoming an energy hub.
The Deepwater Horizon crisis in the Gulf of Mexico has lead to stricter regulations in that area, and further regulation, increased financial assurance requirements, and increased caps on liability are all expected in the time to come. In its 2010 annual report, Husky noted concern that, should those effects reverberate to the South China Sea, costs of compliance would rise, and produce a negative material impact on Husky’s operations here. In the wake of the Bohai Bay spill, have those concerns come true?
Husky’s China operations, similar to all of our worldwide operations, are in compliance with our corporate quality standards. Therefore, any standard increases here in China will only serve to bring general conditions up to our habitual standards. We operate with a North Sea-quality rig, a North Sea-quality drilling contractor, and all of the equipment that we bring to the region is equally qualified. We maintain the same or higher standards in China as anywhere in the world where we operate.
You mention your strict level of quality. Is it challenging to work at this level with domestic Chinese partners?
CNOOC is a global-quality company and they operate internationally. Other operations that Husky has been involved in with CNOOC in the South China Sea, dating back to the early 2000s, have been up to the same standard as our current project in Liwan and that has given us further confidence to move forward jointly in developing the Liwan Project.
Husky, as an integrated energy company, has strong Midstream and Downstream capabilities, particularly in Canada where these two spheres provide specialized support to developing upstream assets. Is it viable to bring these areas of the business east to China?
At this point in time, Husky has no such plans. In Canada and the United States, our Midstream and Downstream assets operate in conjunction with our upstream assets. We produce heavy oil in those regions, and Downstream and Midstream sections of the business are used to facilitate added value to this production. This is not necessary in China, because our interests here are in gas that we produce and sell directly into the market. Our marketing arrangement with CNOOC is such that they will market the gas in conjunction with our company, but they will take the lead in the Chinese market, while we will take the lead in any market that is outside of Mainland China. For example, we would take the lead in selling gas to Hong Kong and neighboring territories.
In our interview with Xavier Chen, head of the E.U. Chamber of Commerce Energy Committee, he explained that his members are currently concerned about: the duration of the Chinese PSC agreement for natural gas – which is 10 years shorter than in many other markets; the domestic pricing mechanism for gas, which puts prices here out of step with international prices; and with the government’s lack of supportive policies for foreign players, who, as Mr. Chen said, have legitimate entities here and so should be too considered ‘Chinese’ companies. Can you comment on Husky’s perception of these and other challenges of working in the natural gas arena in China?
Offshore PSCs in China all essentially refer to commercial pricing. Commercial pricing is commensurate with the global marketplace – we are not speaking of a discounted or subsidized pricing mechanism. At Husky, we have actually already disclosed the fact that we have achieved commercial pricing for Liwan.
The additional commercial terms of the Chinese PSC, if compared with those of other countries in Southeast Asia – even those with concessionary systems – are generally as good if not better than most terms in Asia.
In terms of the perceptions regarding supportive policies, I can say that because our business objectives with CNOOC are closely aligned, all policies essentially affect us equally. There have been no regulations, as far as we have seen, that have unfairly targeted us as an international player.
Husky has said that the Liwan Gas Project will serve as a cornerstone in the company’s plans to establish this region as a major growth pillar. What is Husky’s broader strategy in Asia Pacific, one of three major growth pillars for the group at present? How is the company positioning itself here and what is its future in this territory?
Our goal is to establish a material and growth-oriented business in Asia Pacific. Our target is approximately 50,000 bpd of oil production from the region by 2015. Right now, Husky has assets in two countries in Asia Pacific: China and Indonesia. We have recently announced some new discoveries in an Indonesian block, where we also cooperate with CNOOC. (This, by the way, is an indication that our partnership with CNOOC endures beyond China.)
From our standpoint, we have the cornerstones in place to reach our targeted production. Beyond that, we are looking for opportunities to grow the business throughout Asia. We are very strongly aligned with other players here, and are actively seeking prospects.
What do you believe are the principal lessons that this company has learned in its years of working within this region, with domestic partners?
I would say the first element is that cooperation is key – cooperation with your partners, cooperation with government, and cooperation with local communities. As we do in our business planning globally, we consult and integrate the perspectives of stakeholders into our operations.
Another lesson we have taken away is that, as a company, you must take a long-term view. People say sometimes that things move slowly in Asia. On the contrary, today’s Asia moves very, very fast. The key is to be ready so that you can react accordingly.
What is your final message to the international readers of Oil & Gas Financial Journal?
China has become the largest energy consumer in the world. I believe that any company in our industry that does not have a view to that is likely missing an opportunity. I believe that companies throughout the world will come to see that the prospects here are perhaps different than in other areas of the world, but, at the same time, they are extremely positive and there is an acceptance of Canadian companies and the technology we bring to this area.
I believe that is an important message: we are, as a Canadian company, welcome here; we are able to generate shareholder value, and we are able to be successful here as we adhere to local rules.