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China Economic Net: PetroChina says good-bye to Shell

China Economic Net: PetroChina says good-bye to Shell

Last Updated(Beijing Time):2004-08-10 17:34
Posted 12 August 04

Recently, PetroChina Company Limited (PetroChina) decided to terminate its two-year negotiation with Shell, Exxon Mobil Corporation and Gazprom. The joint venture negotiation was about the participation of these foreign energy groups in the projects of pipelines constructed by PetroChina.

The “West-to-East Natural Gas Transmission Project” is a heavyweight project that is rare in recent years in China. With the total investment of US$ 18 billion, the project involves a total of 4,200 kilometers in length from West China to Shanghai. Before the project started, PetroChina and these foreign energy groups attained a frame agreement in Beijing in July 2002. According to this agreement, in the joint-venture company, PetroChina would hold 50 percent stocks, China Petroleum and Chemical Corporation would have 5 percent, and Exxon Mobil, Shell and Gazprom would each possess 15 percent. The investment would be performed through capital stocks and bank loans. However, the subsequent formal contract failed to be concluded till the current termination of the negotiation.

In view of the operation of the West-to-East Natural Gas Transmission Project, the initial consideration of the Chinese side might be that the project was unprecedented in China and thus had high technical requirements, great difficulties in construction and naturally high risks. With the participation of transnational companies with powerful strengths like Shell and Exxon Mobil, there would be higher success coefficient.

However, in this March, PetroChina had completed the project one year in advance with its own independent work. Its outstanding achievement proves its strength. Meanwhile, PetroChina and foreign energy companies had differences in the light of fixed return on investment. The negotiation between PetroChina and Shell had ever reached a deadlock, as Shell hoped that the Chinese side could ensure Shell’s fixed return on investment of 15 percent while PetroChina stated that it “could not make the promise since any investment has risks”. Previously, the No. 43 document issued by China’s State Council on September 10, 2002 also clearly indicated that any institution could not violate national prescriptions to pledge the fixed return on investment to the foreign sides.

Exxon Mobil, the world’s largest energy group, stood very firmly to have the index of return on investment reaching about 15 percent. The failure of the negotiation can be partially ascribed to the differences among foreign companies.

In addition, the price and market space of the natural gas in China also form the main psychological obstacles for the joint venture. Moreover, the West-to-East Natural Gas Transmission Project will soon succeed, which provides an additional “bargaining chip” for PetroChina to terminate the negotiation.

Though PetroChina has stopped the negotiation on the construction of oil pipelines, these foreign energy groups still have a lot of businesses in China. For example, Shell will invest US$ 1 billion in its various projects in China this year, getting involved in various areas like exploration and exploitation, natural gas and electric power, oil production, chemical products and renewable energy. Foreign oil companies are now contending to import natural gas to China, among which the competition regarding the receiving station of liquefied petroleum gas is particularly intense.

Meanwhile, industrial insiders point out that in the next several decades, questions like “can the operation of the West-to-East Natural Gas Transmission be secure and reliable?” and “can it be ensured that the accidents like the East Sichuan Accident will not happen again?” are what PetroChina needs to carefully think about and provide answers after it has said good-bye to large companies like Shell that have rich management and practical experience.


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