CNOOC's South China Sea Deepwater Discoveries: A Strategic Pillar for Energy Security and Growth

The South China Sea has long been a focal point of geopolitical tension, but beneath its disputed waters lies a treasure trove of hydrocarbon resources that could redefine China's energy security landscape. CNOOC Limited's recent deepwater discoveries, particularly the Lingshui 36-1 gas field and the Kaiping South oilfield, are not just geological triumphs—they are strategic moves to bolster domestic energy production, reduce reliance on imports, and position China as a global energy powerhouse. For investors, these finds present both risks and opportunities tied to long-term growth.

The Scale of Discovery: A Game-Changer for Gas Reserves

CNOOC's Lingshui 36-1 gas field, located in the Qiongdongnan Basin, holds over 100 billion cubic meters (3.5 trillion cubic feet) of proven natural gas reserves, making it the first ultra-deepwater (1,500 meters) ultra-shallow gas discovery globally. This single field contributes significantly to the South China Sea's total proven gas reserves exceeding 1 trillion cubic meters—a milestone that underscores its role in China's “trillion-cubic-meter gas region” strategy.

Meanwhile, the Kaiping South oilfield, situated in the Pearl River Mouth Basin, boasts 102 million tons of crude oil and 380 billion cubic feet of natural gas. With its 100.6-meter-thick pay zones, it is China's first deepwater oilfield to surpass the 100 million-ton threshold in reserves. These discoveries are not isolated; they are part of a systematic effort to unlock the South China Sea's estimated 120 billion barrels of oil equivalent in untapped resources.

Strategic Implications for Energy Security

The geopolitical stakes of these discoveries cannot be overstated. The South China Sea is a critical maritime chokepoint for global trade, and controlling its energy resources enhances China's strategic leverage. By reducing reliance on imported liquefied natural gas (LNG), CNOOC's finds directly support Beijing's “self-reliance” energy policy, which aims to minimize vulnerabilities to external supply disruptions.

The U.S. sanctions targeting CNOOC since 2021—citing threats to regional sovereignty—highlight the risks tied to operating in contested waters. However, CNOOC's relentless focus on domestic projects (e.g., the Shenhai-1 Phase II gas project) and technological innovation (e.g., the Asia-first cylindrical FPSO Haikui-1) suggests it is doubling down on self-sufficiency. This dual focus on production and technology positions CNOOC to dominate regional energy markets despite external pressures.

Production Growth: Fueling Long-Term Prospects

CNOOC's 2024 production hit 726.8 million barrels of oil equivalent (BOE), a 7.2% YoY increase, with plans to raise output to 780–800 million BOE by 2025 and 810–830 million BOE by 2026. The Lingshui and Kaiping fields are central to this growth:

• Lingshui 36-1: Testing achieved 10 million cubic meters/day of gas production, with full-scale development expected to add 5–7% to CNOOC's total gas output by 2026.
• Kaiping South: Already producing 7,680 barrels of crude/day, it could reach 15,000–20,000 barrels/day by 2027 as infrastructure expands.

The company's capital expenditure of RMB132.5 billion (US$18.6 billion) in 2024—directed toward deepwater projects and green initiatives—reinforces its commitment to sustaining this growth. Notably, 70% of 2024 CAPEX went to domestic projects, ensuring returns flow directly to energy security goals.

Sustainability and Risk Mitigation

CNOOC's pivot to green energy integration addresses investor concerns about environmental impact. The Daya Bay CCS/CCUS cluster project and the 16-megawatt floating wind platform (54 million kWh annual capacity) signal a strategic shift toward reducing emissions while maintaining hydrocarbon dominance. Additionally, the Wushi 23-5 oilfield, China's first green-designed offshore field, proves that low-carbon practices can coexist with production targets.

Yet risks persist:
1. Geopolitical Tensions: U.S.-China friction over the South China Sea could escalate sanctions or hinder international partnerships.
2. Technological Hurdles: Ultra-deepwater drilling requires advanced expertise; delays in project execution could impact timelines.
3. Commodity Volatility: Oil and gas prices remain cyclical, though CNOOC's diversified portfolio (including LNG and petrochemicals) mitigates this risk.

Investment Thesis: Balancing Ambition and Caution

For investors, CNOOC's deepwater plays offer compelling upside:
- Reserve Replacement: The Lingshui and Kaiping finds add ~10 years of reserve life, crucial for sustaining production.
- Dividend Attractiveness: A 44.7% payout ratio and 12% YoY dividend growth (to HK$1.40/share in 2024) suggest shareholder returns remain a priority.
- Long-Term Demand: Asia's energy demand growth (+3% annually to 2030) will favor companies with low-cost, domestic resources.

However, geopolitical risks and capital allocation efficiency must be monitored. Investors should weigh CNOOC against peers like Chevron or Petrobras, using metrics like EV/Reserves or ROACE (Return on Capital Employed).

Conclusion: A Bold Bet on Energy Autonomy

CNOOC's South China Sea discoveries are more than just resource plays—they are a declaration of intent to solidify China's energy independence. While geopolitical risks linger, the scale of these finds, paired with technological prowess and disciplined capital allocation, positions CNOOC to dominate regional energy markets for decades. For long-term investors seeking exposure to Asia's energy transition, CNOOC's stock offers a high-reward, high-risk opportunity. Monitor geopolitical developments closely, but do not overlook the strategic calculus behind these deepwater bets.

In a world where energy security is power, CNOOC is building its crown.

Disclaimer: This analysis is for informational purposes only and does not constitute financial advice. Investors should conduct their own due diligence.