Cnooc Ltd. (0883.HK) shares surged nearly 3% in Hong Kong on Monday, buoyed by news that the blue-chip offshore oil producer signed a deal Friday to develop coalbed methane in China over the next three decades and would commit 9.93 billion yuan ($1.56 billion) toward exploration in the initial five years.
Cnooc Ltd. (0883.HK) shares surged nearly 3% in Hong Kong on Monday, buoyed by news that the blue-chip offshore oil producer signed a deal Friday to develop coalbed methane in China over the next three decades and would commit 9.93 billion yuan ($1.56 billion) toward exploration in the initial five years.

Analysts said that even though the deal will have little immediate impact on Cnooc's earnings, it marks a longer-term effort by the company to shift its resource base to more unconventional supplies, following its megadeal to buy Canadian oil producer Nexen Inc. for $15.1 billion last month.

At 0616 GMT, Cnooc's shares were 2.7% up at HK$15.76, after hitting an intraday high of HK$15.84. In comparison the benchmark Hang Seng Index rose 1.85%.

"This is a more reasonable move, compared with the Nexen transaction, as it fits into Cnooc's strong competence in China ," Bank of American Merrill Lynch analyst Thomas Wong said in a note. "We continue to view [2013] as a very difficult year for Cnooc, with slow production growth and integration issues with Nexen."

Cnooc targets to increase production of oil and gas between 6% and 10% annually through 2015. However, output has been disrupted by several oil spills last year at its Penglai 19-3 field in Bohai Bay , northeast China , and the slow development of its offshore deepwater blocks in the South China Sea . Cnooc produced 331.8 million barrels of oil and gas in 2011, up just 0.7% from a year earlier.

As a result, the company is stepping up efforts to tap into alternative sources of energy, including coalbed methane, a type of clean-energy source, and shale-gas extraction.

Under Friday's agreement, Cnooc and its partner China United Coalbed Methane Corp.--which is jointly owned by Cnooc's parent China National Offshore Oil Corp. or Cnooc Group, and state-owned China National Coal Group--aim to explore, develop and produce coalbed methane gas in China for 30 years.

Cnooc Ltd. will be responsible for the entire cost of exploration, which will take place over the next five years. If successful discoveries are made, CUCM has the option to increase its participating interest from zero to 50% and pay for its share of the development and production costs, Cnooc said in a statement.

China says it has vast recoverable resources of coalbed methane--about 10.9 trillion cubic meters--but it is far from meeting ambitious CBM output goals due to complex geology, high distribution costs and unattractive joint-venture terms.

It has a target of 16 billion cubic meters of CBM output a year by 2015, but produced just 2.3 billion cubic meters last year, a tiny share of national gas use. China's apparent consumption of natural gas rose 20.6% to 129 billion cubic meters in 2011, according to China National Petroleum Corp.

Meanwhile, although China's development of shale gas has received more attention in recent years because of its higher resource potential, it is unlikely to exceed China's coal-to-gas and coalbed-methane gas output before 2024, analysts at energy consultancy Wood Mackenzie said in June.

"These sectors are therefore far more significant through the medium term," said Gavin Thompson, head of Asia-Pacific gas research at Wood Mackenzie, in a separate statement.

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