OREANDA-NEWS. November 28, 2013. China is set to start the pumps at its first deep-water natural-gas project, an engineering feat using a Chinese-made platform designed to withstand typhoons and using hundreds of miles of undersea pipelines.

The field is part of Beijing's effort to more than double its use of gas to 10% of China's energy mix by 2020, helping to wean the country off the dirtier coal that produces two-thirds of its electricity.

The Liwan-3 gas field in the South China Sea about 200 miles southeast of Hong Kong is expected to go online by early next year and eventually to pump about 4% of the country's gas supply. It has the potential to send more gas to China than current imports from Australia, China's second-largest supplier of liquefied natural gas.

For all its complexity, the USD6.5 billion project is located well. The field is in undisputed waters in the South China Sea and close to where China most needs the gas—its fast-growing, but energy-deficient, southern and eastern coastal regions.

Husky Energy Inc., HSE.T +0.20% which is controlled by Hong Kong billionaire Li Ka-shing, operates the project and owns 49%. Chinese state-owned energy company Cnooc Ltd. 0883.HK +1.20% holds the rest.

Cnooc has made a push to develop its offshore-drilling expertise, last year paying USD 15.1 billion for Canada's Nexen Inc. That purchase gave Cnooc access to technical skills used by Nexen in the Gulf of Mexico, which is far deeper than Liwan's location, and which can be used in future deep-water projects. Husky and Cnooc contracted with deep-water specialists, including Italy's Saipem SPM.MI +0.80% SpA, tfor assistance at Liwan.

"We're within an arm's length of realizing first gas production," Husky Energy Chief Operating Officer Robert Peabody said in an October 24 presentation. The Calgary, Alberta, company said that it is "on-time and on-cost" to start production by the end of this year or early next.

Liwan's initial output of about 300 million cubic feet a day will rise to about 350 million next year when a second, nearby field goes online. With the connection of a third field more than a year from now, production is expected to reach about 500 million cubic feet a day.

Liwan's peak output, in 2015, will amount to around 4% of Chinese domestic gas output and roughly 7% of the gas that China imports. "Small numbers, but quite impressive from just one development," said Craig McMahon, of consulting firm Wood Mackenzie.

The first gas will come from nine wells drilled into the seabed beneath 4,750 feet of water. The gas will then flow through two 49-mile pipelines to a shallow-water platform—the core of the project—at which point it will be piped 160 miles to the coast between Macau and Hong Kong.

The 30,000-ton, Chinese-designed platform, which stands in 230 feet of water, contains enough steel to build four Eiffel Towers. It is built to withstand 30-foot waves and winds of more than 100 miles an hour. For Liwan, Cnooc also used the first deep-water rig and pipe-laying ship to be made in China.

"It is typhoon alley out there, a very difficult environment for sure," said Simon Powell, of brokerage firm CLSA.

Liwan is far from the southern and western parts of the South China Sea, where energy development has been blocked by competing sovereignty claims by China, Vietnam, the Philippines and others.

Beijing last month offered 25 blocks in the sea to joint-venture development. BP BP.LN +0.43% PLC and Chevron Corp. CVX +0.39% are among the foreign companies already exploring deep waters off southern China, under contracts that give Cnooc the right to take a 51% share if commercial development begins. The U.S. Energy Information Administration has estimated there could be 190 trillion cubic feet of gas and 11 billion barrels of oil under the South China Sea.

But Cnooc's developing skills will make it less reliant on foreign partners, off China's coast or elsewhere. The company already has invested in deep-water projects in Brazil, West Africa and the Gulf of Mexico.

"Large-scale deep-water rigs are our mobile national territory and a strategic weapon," Cnooc Chairman Wang Yilin said 18 months ago at the launch of the deep-water Cnooc rig at Liwan.

Much of the Liwan project's expected output already has been sold at between USD11 and USD 13 per million British thermal units to Chinese companies, about one-third less than the current spot-market price of liquefied natural gas sold in Asia.

China also is trying to meet ballooning demand using overland pipelines and tankers. The country's seaborne LNG imports, mostly from Qatar and Australia, rose 20% last year and 23% for the first nine months of this year. Chinese companies also plan to import LNG from Russia, North America and Mozambique. China's onshore gas output rose just 6.7% last year, to 107 billion cubic meters.

China last month fully opened the taps on a pipeline running from the Bay of Bengal and across Myanmar into southwestern China. That complemented supplies from a larger pipeline running from Turkmenistan to China's westernmost region, Xinjiang, which has been extended to China's industrial regions in the south and east.