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PetroChina cancels talks for joint venture

Financial Times: PetroChina cancels talks for joint venture

“decision brought to an end the involvement of Royal Dutch/Shell and Exxon/Mobil”

By Carola Hoyos in London and Richard McGregor in Shanghai

Published: August 3 2004 16:38 | Last updated: August 3 2004 16:38

Posted 4 August 04

PetroChina, China’s largest oil producer, has terminated the $18bn joint venture negotiations with international energy groups over its 4,200km natural gas pipeline from the west of the country to Shanghai.

The decision brought to an end the involvement of Royal Dutch/Shell and ExxonMobil, two of the world’s largest international oil companies, and Gazprom, Russia’s gas monopoly, after two years of often tense negotiations.

Analysts said the project failed because PetroChina was unable to secure high enough natural gas prices from consumers in Shanghai and other cities, making the international companies nervous about being able to meet their returns targets for the project. ExxonMobil, the world’s largest energy group, is particularly insistent on meeting returns targets of about 15 per cent.

Exxon, Shell and Gazprom were to have owned 15 per cent, PetroChina 50 per cent and Sinopec, the Chinese refiner 5 per cent.

The foreign companies were also frustrated in the talks by PetroChina’s top management, which long showed little enthusiasm about accommodating the foreign companies’ concerns. The involvement of the international oil companies had been particularly important for Zhu Rongji, China’s former prime minister, who sought out foreign participation and technology for large state infrastructure projects.

However, the departure of Mr Zhu 18 months ago left state-owned PetroChina and its chairman at the time, Ma Fucai, with little incentive to co-operate with the foreign companies.

In an interview with the FT last year, Sir Philip Watts, Shell’s former chairman, admitted he saw no end in sight for the company’s disagreements with PetroChina.

He said: “You have to be very dogged about the terms you expect because you’re putting billions of dollars of Shell’s money into it.”

Though the collapse of the negotiations is a blow for international oil companies eager to be involved in one of the most promising energy markets of the future, it does not signify a large exit. Shell, for example, this year intends to spend more money than it ever has before in China. The company will spend $1bn on projects in all of its operation areas, including exploration and production, gas and power, oil production, chemicals and renewable energy.

International oil companies are racing each other to import natural gas to China, with competition over liquefied natural gas terminals especially fierce.

“The west-east pipeline was an interesting opportunity but it was one part of a very large market we are developing on many fronts,” said one Shell official. He added that the project was “large and complex” and that the participants were unable to find common ground that satisfied everyone.

The collapse of such a high-profile joint venture is embarrassing for PetroChina, and the problems surrounding it contributed to Mr Ma’s resignation as chairman of the company earlier this year.

The construction of the pipeline itself is almost complete and the first gas transported through it was delivered to Shanghai this year.

The pipeline is a centrepiece of China’s energy policy. Under the plan, natural gas will account for about 8 to 10 per cent of the country’s fuel consumption by 2020, up from virtually zero now, as part of an effort to reduce reliance on the use of coal and oil.

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