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The Wall Street Journal: Shell Starts Up China Gas Field To Supply Beijing

Wall Street Journal China Graphic

By SHAI OSTER
March 2, 2007

BEIJING — Royal Dutch Shell PLC has started producing natural gas from a field in northern China that aims to help quench Beijing’s growing thirst for the fuel as it strives to reduce pollution ahead of the 2008 Summer Olympics.

Shell will spend about $600 million to $700 million to drill about 50 wells during the next seven years to develop the 1,693-square-kilometer Changbei gas field that lies mostly in Shanxi province, near its border with Inner Mongolia. The company is developing the field as part of a production-sharing contract with PetroChina Co., which owns Changbei.

China jealously guards its oil and gas industry. PetroChina, which has been ramping up domestic natural-gas production, called in foreign help to develop Changbei because of the field’s complicated geology. Shell drilled down three kilometers before branching off into two horizontal wells to release gas trapped in a 15-meter-thick layer of permeable rock.
 
The project, with an anticipated lifespan of 20 years, is one of the biggest joint ventures in oil and gas in China.

“The key thing is it’s a supply of gas to Beijing, which will allow Beijing to clean up,” Simon Durkin, head of Shell’s China oil-and-gas exploration and production unit, said Thursday.

After Shell has recovered its development costs at Changbei, PetroChina will eventually get about half of the gas, a clean-burning alternative to coal. Changbei is expected to produce three billion cubic meters a year, which PetroChina will distribute inside the country.

The gas will initially be piped mostly to Beijing, but will later be routed to other areas as local gas markets develop.

Terms of the contract, signed in 2005, weren’t disclosed. China’s government controls domestic fuel prices including that of natural gas, which is used for cooking, heating and power generation.

Beijing is aggressively cutting the use of highly polluting coal for power and other uses as part of efforts to improve its notoriously bad air quality before the Olympics. But demand for natural gas from a building boom has outstripped China’s supply.

Shell, which has some offshore oil production in the country with other partners, is also looking at a region in northeast China where it could develop oil shale, a rock that can yield oil after a complex distillation process.

Write to Shai Oster at [email protected]

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