China National Offshore Oil Corp. said it has signed two production sharing contracts with BG Group for deepwater blocks in the western South China Sea, the first step in their cooperation in offshore China.

The companies have also agreed on a geophysical survey on a third block in the eastern South China Sea.

Under the agreement, BG will keep 100 percent interests in the blocks during the exploration phase. China National Offshore Oil unit CNOOC Ltd. will have the right for up to 51 percent working interest in any commercial discoveries.

BG will conduct seismic work on the two blocks under production sharing contract and drill one exploration well in each. BG will gather some seismic data on the third block under the geophysical survey agreement.

CNOOC had offered the three blocks for cooperation, along with nine others, in 2002. The 12 cover a total area of about 9,960 square miles (25,500 square kilometers) in water depth ranging from 590 feet (177 meters) to about 6,900 feet (2,070 meters).

U.S.-listed shares of Hong Kong-based CNOOC fell 55 cents to $74 in morning trading on the New York Stock Exchange. Meanwhile, British BG's American depositary shares fell 45 cents to $64.14 on the NYSE.