Cnooc to Cut Costs, Boost Output to Survive ‘Winter’

By Wang Ying and John Duce

April 1 (Bloomberg) -- Cnooc Ltd., China’s biggest offshore energy explorer, will cut costs and boost oil production this year to help cushion a likely slump in profit as the global recession curbs fuel demand. The shares rose.

“In 2009, we continue to feel the pinch of a severe winter,” Chairman Fu Chengyu said in his annual earnings statement yesterday. Profit surged 42 percent to a record 44.4 billion yuan ($6.5 billion) last year, with the bulk of the gains coming in the first half amid record oil prices.

Cnooc appointed Yang Hua, 47, as its president to inject “new blood” into the Beijing-based company as the oil and gas explorer copes with crude’s 67 percent decline from a July record. Yang, who also serves as chief financial officer, pledged to control costs as Cnooc increases investment this year to boost production and reserves.

“There’s nothing Cnooc can do about the price of oil,” said David Johnson, a Hong Kong-based energy analyst with Macquarie Group Ltd. The company will “just have to put its head down, keep exploring for more assets and come out the other side.”

Profit growth slowed to 1 percent in the second half of 2008 from 89 percent in the first six months. Earnings were hurt by crude’s decline from an all-time high of $147.27 a barrel on July 11 because Cnooc relies on oil production for 82 percent of its revenue.

Low oil prices will have a “material effect” on this year’s earnings, Cnooc said yesterday. Profit in 2009 may tumble 40 percent to 26.5 billion yuan, according to the median of eight analyst estimates.

“We can’t control or even influence the price of oil,” Yang said at a media briefing in Hong Kong yesterday. “The only thing we can do is mind our own business and also control costs well.”

Capital Spending

Cnooc said the company’s “healthy balance sheet and strong cash reserves” will allow it to increase spending on exploration and development this year. Capital expenditure may rise 19 percent in 2009 after gaining 34 percent to $5.15 billion last year, according to Fu.

“We are boosting our capital expenditure amid the financial crisis to prepare for future demand,” Fu told reporters in Hong Kong. There are no delays in any of Cnooc’s deepwater drilling projects, he said.

The company’s shares rose as much as 4.4 percent to HK$8.02 in Hong Kong today, the most since March 24, and traded at HK$7.84 at 10:53 a.m. local time. The benchmark Hang Seng index gained 0.2 percent.

Cost Control

Cnooc will be profitable with oil at $30 a barrel, Fu said. All-in costs stood at $19.78 a barrel last year, “still competitive compared with industry peers,” the company said in its statement.

Costs will be strictly controlled, Cnooc said in the statement. Exploration costs fell 0.7 percent to 3.4 billion yuan last year.

“We have already discovered a lot of reserves that can be developed at lower costs by us than our peers,” Fu said. “Our field development normally takes three years to complete, and after that, we may see another round of economic growth.”

Cnooc expects to start 10 projects this year, including the OML130 oilfield in Nigeria in which it has a 45 percent stake, and the Tangguh liquefied natural gas project in Indonesia.

Oil production may rise by between 6 and 10 percent annually in the five years to 2015, Yang told reporters. The company plans to boost output by between 15 percent and 18 percent to as much as 231 million barrels of oil equivalent this year. China accounts for almost 90 percent of Cnooc’s oil and gas assets.

The company will seize “good” overseas acquisition opportunities and focus on domestic offshore fields in the long term, said Yang.

‘New Blood’

Yang’s appointment is part of the company’s plan to inject “new blood into the management,” Fu said. “As Cnooc enters a new era of growth, more young and experienced leaders with international perspective” will be inducted, he said.

Yang, 47, joined Cnooc in 1982 as a researcher after getting a bachelor’s degree in Petroleum Engineering at the China University of Petroleum. Yang did his masters in business administration at the Massachusetts Institute of Technology’s Sloan School of Management.

Outgoing president Zhou Shouwei, 58, will become a non- executive director of the company and will chair the board’s nominations committee. Under Zhou, Cnooc posted seven consecutive years of gains in earnings.

To contact the reporters on this story: John Duce in Hong Kongt . jduce1@bloomberg.net; Wang Ying in Hong Kongt . ywang30@bloomberg.net;