The Sydney-based company is partners in the block under a memorandum of understanding with operator China National Offshore Oil Corporation.

The Lei Dong prospect area lies in shipping lanes that access the city of Zhanjiang, an oil and gas port as well as a port for the Chinese Navy.

Horizon blamed issues with the Navy for the reason why the petroleum contract is yet to be granted.

Chief executive Brent Emmett described CNOOC’s efforts to obtain approval for the permit as “persistent” and “thorough”.

“Our judgment on Lei Dong is that award of a petroleum contract will remain speculative at best in the foreseeable future and that the company’s interests are best served by focusing on the rest of the portfolio, where tenure is clear, and adding to it as we find new opportunities,” he said.

“The lack of success at Lei Dong is a disappointment but underlines the risk that often exists when an exploration company engages with designated authorities for formal award of petroleum prospecting rights, even as in this case on an exclusive basis.”

Emmett added the relationship between CNOOC and Horizon remained strong, even though it meant the companies were unable to progress into a joint venture.

Since the MOU was formed in 2004, Horizon has spent $US487,000 on seismic reprocessing and interpretation work, in return for an option to convert it into a petroleum contract.

The MOU approach was taken in recognition of the possibility that the Government approval process might be protracted.

This allowed Horizon Oil to get a head start by proceeding with preliminary exploration work that did not require field access and resulting significant expense, while the approval process took place.

The total amount incurred by Horizon Oil was US$487,000, which was expensed in the 2005 and 2006 financial years.

The MOU provides for CNOOC to negotiate with Horizon Oil in the future, should approval be granted to offer Lei Dong to foreign companies for exploration. Horizon Oil shall consider that option, if and when it arises.

On the other side of the ledger, Horizon Oil has recently been granted Blocks G10-48 and G11-48 in Thailand, and has been successful in renewing its Petroleum Retention Licence 4 in Papua New Guinea, which will allow appraisal of the resource to be carried out.

“There are high potential targets in these plays that we can begin drilling in the near term.

“The permits are large, contain existing discoveries in proven hydrocarbon trends and because of this the exploration risk is manageable.

“Shareholders can expect to see at least ten exploration and appraisal wells drilled in 2007 and 2008.”