CNOOC Ltd, China's largest offshore oil producer, will spend 9.93 billion yuan (US$1.56 billion) over the next five years to explore for coal-bed methane as part of a 30-year agreement with CUCBM.

CNOOC shares rose 2.1 percent yesterday in Hong Kong as analysts said the deal could help it diversify and accelerate development of China's nascent coal-bed methane sector.

CUCBM, or China United Coalbed Methane Corp, was established in 1996 as a state vehicle for the development of the unconventional fuel, which is a natural gas extracted from coal seams. CUCBM holds 10,866 kilometers of coal-bed methane acreage in nine provinces including Shanxi, Shaanxi and Yunnan.

Under the agreement, CNOOC and CUCBM aim to explore, develop and produce methane gas for 30 years, CNOOC said. CUCBM is equally owned by China National Offshore Oil Corp, CNOOC's parent, and China National Coal Group Corp.

CNOOC said the deal represents a strategic step to diversify its existing reserve portfolio and to develop new business areas for long-term growth, adding the spending in the first five years will be funded by internal resources.

Future costs and production will be split between CNOOC and CUCBM on a 70/30 ratio.

Sanford C. Bernstein analyst Neil Beveridge estimates the agreement will provide CNOOC additional production of up to 2 billion cubic meters over the next three to five years.

"CNOOC Ltd has taken a major step into onshore coal-bed methane in China as it seeks to increase exposure to unconventional oil and gas assets," Beveridge wrote in a note yesterday. He added the deal is "a shot in the arm" for China's fledgling coal-bed methane sector that will accelerate the development of the resource.
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