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Hong Kong Standard: Shell, PetroChina gas project revived

Hong Kong Standard: Shell, PetroChina gas project revived

Karen Teo

May 13, 2005

Royal Dutch/Shell still wants to play a big role in China’s gas sector. XINHUA

Failure to invest in PetroChina’s West-to-East gas pipeline megaproject has done nothing to dampen Royal Dutch/Shell’s enthusiasm to participate in other China gas projects.

The supermajor and PetroChina are close to signing a final agreement to jointly develop the Changbei gas field in northwest China’s Ordos Basin, Shell’s first onshore upstream development in the country, sources said.

When foreign firms have failed to reach agreement with potential Chinese partners, the reasons have varied according to the project.

In the case of the West-to-East pipeline, it was more a case of PetroChina wanting to go solo. But when companies including Shell and Unocal pulled out of the Xihu project, it was for commercial reasons.

Clearly, Shell still wants to play a big role in China’s gas sector. It formed a US$91 million (HK$709.8 million) joint venture recently with Hangzhou Gas (Group) to operate and manage a high-pressure gas pipeline system in Hangzhou, possibly paving the way for other investments, including liquefied natural gas (LNG) terminals, in east China.

Industry sources say Shell has been in talks with Chinese oil companies about investment in LNG projects.

The Changbei gas field project in the Ordos Basin will likely be a 50-50 joint venture between Shell and PetroChina, with Shell as the operator, according to a source at PetroChina.

When it was first discussed in 1996, the project was expected to deliver three billion cubic meters of gas per year – one-third of the West-to-East pipeline’s present capacity – for 20 years from 2007. Changbei holds 70 billion cubic meters of gas reserves, according to Reuters. The gas will supply Beijing, Hebei, Shandong and Tianjin and other cities.

Shell and PetroChina have had Changbei in their sights for years. In 1999, they signed an agreement to cooperate in the project, originally conceived as an integrated one with both upstream [production and storage] and downstream [distribution and marketing] development.

Talks stalled when Shell turned its attention to the West-to-East pipeline, according to industry observers.

Now, the project is being revived as a pure upstream venture.

Shell declined to comment. PetroChina’s motivation to enlist more foreign help in gas exploration could be due to concerns that the Tarim Basin may not hold enough reserves to feed the West-to-East gas pipeline. The company said in March it was contemplating a tie-up with France’s Total to explore for gas in the Sulige field in Inner Mongolia. Both Changbei and Sulige would supplement supplies to the West-to-East pipeline, PetroChina said.

“The general trend has been for Chinese companies to develop onshore oil and gas projects themselves,” said Scott Weaver, an analyst with Macquarie Research Equities. But though PetroChina is not short of cash, he believes it may now wish to diversify its risks with foreign help.

According to PetroChina, Shell has also shown an interest in participating in Tarim and Sichuan basin gas projects, but no agreement has been reached.

“Foreign companies are still interested in investing in China despite the fact that both sides [Shell and PetroChina] eventually were not able to come to mutually agreeable terms within the West-to-East pipeline project,” Weaver said.

The Tarim, Sichuan and Ordos basins are considered the regions where more gas is most likely to be found.

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