China puts stop to Conoco offshore production citing “negligence”

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September 4, 2011

ConocoPhillips chinese oil spill CNOOCSHANGHAI—China’s coastal waters regulator on Friday ordered ConocoPhillips to suspend production in the country’s largest off-shore oil field, citing “negligence” by the U.S. energy company in handling underwater leaks.

The move by the State Oceanic Administration, which manages Chinese waters, rejects the Houston company’s claims this week that it stopped oil leaks associated with spills reported in June. Conoco, the agency said, “has not fulfilled its responsibility as a reasonable and prudent operator.”

A Conoco spokesman on Friday expressed surprise at the order and said it is working with the regulator to better understand its rationale. He added, “we have acted swiftly and have contained any release to the ocean.”

The requirement to suspend activity across the offshore oil field, called Peng Lai 19-3, is a blow for Conoco and its joint venture partner, state-owned China National Offshore Oil Corp., or Cnooc.

It is expected to have less influence on China’s overall supply situation.

Suspension is a sharp rebuke of Conoco: spills were associated with only two of at least eight platforms and facilities it has in the Bohai Sea to service the field, equipment that is separated by miles of water. The closure comes after Conoco this week said it had met China’s Aug. 31 deadline to soak up and otherwise address problems associated with the spills that involved 3,223 barrels of crude oil and drilling fluids.

A halt in production at China’s largest offshore field is likely to send refineries that depend on the wells’ output scrambling for supply, but may not much alter China’s energy situation.

“It’s not going to be something that’s going to have a large impact on China’s national production,” said Tom Grieder, a Geneva-based analyst for IHS World Markets Energy.

IHS says China in 2010 produced about 4.07 million barrels a day, but little of it was from offshore production bases like Conoco’s. Figures from Conoco suggest the field produced around 114,500 barrels a day last year, and in recent months had sagged below that level.

The Chinese company owns 51% of the field; Conoco owns 49% and is the operator. Cnooc didn’t respond to a request for comment.

The company noted the field was already producing at a reduced rate and that its portion of the output represented about 3% of its global annual production. Capacity of the field is rated at 160,000 barrels a day. Conoco has heavily invested to ramp up production since oil was discovered in 1999 and production began in 2002.

Conoco has interests in two other areas in Bohai Bay, but they are smaller.

The Oceanic Administration may have acted in response to Conoco’s recent findings that a liter or two of oil a day continued to seep from the seabed despite a halt to the original spills in June. The company cited pressure build up and said it was capturing all the oil that emerged.

To comply with Beijing’s order to halt all discharge by Aug. 31, Conoco said this week it was “reducing reservoir pressure” near one platform. Friday’s statement said that activity will continue in a safe and environmentally responsible way.

The Oceanic Administration put no timetable on the shut-down order, but said it hinged on the producers taking new steps including procedural changes and making an environmental impact study.

In the almost three months since the first spill was reported on June 4, Conoco has spared little effort to detail its regret for the accidents and show its commitment reduce the problems. The company has garnered little notice in Chinese state media for efforts such as collection of 14 tons of trash on Chinese beaches by its surveyors and findings that almost all of the oil seen on shore was fuel oil, apparently leaked by ships not its platforms.

The Oceanic administration in particular has directed sharp criticism at Conoco in recent days, including sending strong suggestions that it would seek monetary compensation from the oil company for the accident. Chinese companies rarely face sustained heavy criticism from authorities when blamed for industrial accidents.

IHS’s Mr. Grieder said the biggest long-term impact may be on Conoco’s own ambitions in China, such as securing contracts to produce energy from unconventional sources like gas from shale. Any extended challenge to Chinese authorities, for instance over future compensation claims, could leave Conoco, the analyst said, “effectively frozen” in its ability to get future footholds.

Daniel Gilbert contributed to this article.

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