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Pipeline pullout embarrasses Petrochina

Financial Times: Pipeline pullout embarrasses Petrochina

By Carola Hoyos, Uchenna Izundu and Richard McGregor

Published: August 4 2004 04:00 | Last updated: August 4 2004 04:00

Petrochina’s sharp termination of its joint venture negotiations with foreign energy groups over their involvement in a $18bn (€14.9bn, £9.8bn) west-to-east pipeline is embarrassing for China’s largest oil producer and its potential partners.

But the break-up will come as no surprise to the industry, which has long sensed that all was not well in the negotiations between the Chinese and the overseas participants, Royal Dutch/ Shell, ExxonMobil and Russia’s Gazprom.

The 4,200km-long project, stretching from the deserts of Xinjiang to Shanghai on the coast, equal to about two-thirds the length of the Great Wall, is a symbol of China’s commitment to invest heavily to meet the energy needs of its consumer and industrial economies.

The central government hopes that gas will meet up to 10 per cent of China’s energy needs by 2020, from nearly zero today, weaning the country off its dependence on coal.

Even as the talks have continued, the main pipeline has been all but completed, and has been delivering gas to Shanghai since January.

But for financial and political reasons, the business of the pipeline has been unable to match the swiftness of its construction.

China’s insistence on keeping the price of gas down for the project’s main market, industrial users such as large petrochemical companies, frustrated the foreigners, analysts and officials said last night.

Despite government support for environmentally friendly gas, in some cities coal remained much cheaper for local government and factories. So too was some imported liquefied natural gas (LNG).

Although the foreign companies did not demand an absolute rate of return, officials and executives said, the deal foundered on the inability of the parties to reach an agreement with Petrochina that matched the original joint venture framework.

It was also not simply an issue of the Chinese versus the foreigners – the foreign companies had disagreements as well, and did not negotiate as one united front, officials said.

The problems with the venture were recognised early by BP, which left the project more than two years ago.

Chinese politics also played a central role in the joint venture’s unravelling. Zhu Rongji, China’s former premier, had been enthusiastic about attracting foreign investment to the project, in the hope that the expertise and capital would help the pipeline and aid reforms at Petrochina, a state-owned behemoth.

But Ma Fucai, Petrochina’s former chairman, displayed little interest and flexibility in dealing with the foreigners’ complaints, China-based executives said. Mr Ma was forced to resign this year, after a deadly gas explosion at one of Petrochina’s operations in western China, but his poor handling of the pipeline negotiations contributed to his demise, officials said.

Mr Zhu’s departure made it easier for the government to step away from the joint venture, and allow it to fall apart. “It’s a sign of a healthy and more sensible attitude at the top of the government,” said one foreign energy executive last night.

The pipeline will go ahead as planned, without foreign involvement. But if there is any shortfall in meeting costs, the bill will be picked up by the government and Chinese taxpayers.

For international energy companies keen to exploit China’s growing thirst for oil and gas, the breakdown comes as a disappointment.

Peter Flowerday of Gas Strategies, a consulting firm, said it was not surprising that negotiations had broken down.

“It is a bad sign for international companies wanting to invest in China; this appears to be part of a wave of China investing for itself,” he said.

“I don’t understand why the west-east pipeline needed foreign investment as the Chinese have already gone ahead and built it without foreign help.”

Additional reporting by Uchenna Izundu in London

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