China's CNOOC Finds Its Oil

If at first you don't succeed, move on to the next opportunity.

Although China's CNOOC (NYSE: CEO  ) didn't wrest Unocal away from Chevron (NYSE: CVX  ) , there are other offshore oil opportunities in the sea. CNOOC locked one of them up on Monday, agreeing to acquire a 45% working interest in an offshore Nigerian energy field for nearly $2.3 billion in cash.

CNOOC will be buying its license from a Nigerian company by the name of South Atlantic Petroleum -- a company supposedly controlled by a former Nigerian government official. Interestingly, the state-owned Oil & Natural Gas Corp of India originally had a deal in place to buy the same working interest for about $2 billion, but the deal fell through when India's cabinet would not approve it.

Assuming that estimates of the amount of recoverable oil and gas in the field prove accurate, CNOOC will be paying about $4.60 per barrel of oil equivalent. That looks cheap, but you should consider some relevant factors.

First, the estimates provided by the operator of the field, French energy giant Total (NYSE: TOT  ) , a Motley Fool Income Investor recommendation, don't seem to constitute proven reserve estimates -- the standard by which I usually evaluate energy deals. Second, deepwater drilling is tricky and expensive (look at how much Transocean (NYSE: RIG  ) is getting in dayrates to see what I mean). Finally, you're talking about doing business in Nigerian waters and, by extension, with the Nigerian government -- a government so corrupt that only countries like Myanmar look much worse.

Still, if things go right and CNOOC hits its target of about 80,000 barrels per day from this field in 2008, that'll be a significant contribution (the company produces about 410,000 barrels per day now). What's more, energy companies need to add reserves if they are going to grow. Is this is a risky investment? Sure. But it almost goes without saying that you have to take some risks in the oil business if you want to make money.

For more energetic Foolish Takes:

• Russia's Gas Weapon
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).