Cnooc Ltd., China's biggest offshore energy producer, started drilling at its first domestic shale- gas project, joining rivals including China Petroleum & Chemical Corp. in the search for unconventional natural gas.

Exploration started Dec. 29 at the project in eastern Anhui province, China National Offshore Oil Corp., Cnooc's parent, said in a statement on its website yesterday. It's also the Hong Kong-listed unit's first onshore exploration project, according to the statement.

China, estimated to hold more natural gas trapped in shale than the U.S., has yet to produce the fuel commercially. Chinese energy explorers have been seeking shale technology and expertise by buying stakes in overseas fields, including acquisitions of Chesapeake Energy Corp. assets by Cnooc.

"It may take more than five years for Cnooc to turn this exploration into real production, but the key message here is Cnooc signals a new direction on where the company will move in the future,"said Neil Beveridge, a Hong Kong-based energy analyst at Sanford C. Bernstein & Co. "Cnooc will count heavily on unconventional oil and gas for growth down the road.”

Chinese shale may hold 1,275 trillion cubic feet (36 trillion cubic meters of gas), or 12 times the country's conventional natural gas deposits, the U.S. Energy Information Administration said in April. China's "technically recoverable"reserves are almost 50 percent more than the 862 trillion cubic feet held by the U.S., the EIA said.

China National Petroleum Corp., the country's biggest energy producer, agreed in June to form a venture with Royal Dutch Shell Plc to improve its drilling efficiency after taking 11 months to complete the nation's first shale-gas well.

Shale-Gas Auctions

Cnooc rose 1.3 percent to HK$15.38 yesterday, compared with the 0.8 percent gain in the benchmark Hang Seng Index.

The shale-gas project, located in Anhua's Wuhu city, covers an area of 4,800 square kilometers (1,853 square miles), China National Offshore said. The company didn't say when Cnooc acquired the rights to explore for shale gas in the area.

Cnooc joined China's first shale-gas exploration rights auction in June and lost to China Petroleum and Henan Provincial Coal Seam Gas Development and Utilization Co. Sinopec, as China Petroleum is known, and Henan Provincial won the rights to search for the fuel in the Nanchuan and Xiushan blocks.

The Nanchuan block, an area of 2,198 square kilometers, straddles Chongqing municipality and Guizhou province in the southwest, while Xiushan, spanning Chongqing, Guizhou and Hunan, has an area of 2,039 square kilometers, the land ministry said June 29.

China has scheduled a second auction for January, Zhang Dawei, deputy director of oil and gas research at the Ministry of Land and Resources, said Dec. 29.

Cnooc has bid for at least $16 billion of assets overseas since the beginning of 2010, including stakes in Chesapeake's Niobrara and Eagle Ford shale projects.