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Reuters: UPDATE 2-Kuwait wants Shell out of China refinery plan-KUNA

Tue Sep 25, 2007 12:47pm BST
(Adds Shell, BP, Dow no comment, analyst comment, background)

KUWAIT, Sept 25 (Reuters) – Kuwait wants to drop Royal Dutch Shell (RDSa.L: Quote, Profile, Research) as a partner and is instead considering BP (BP.L: Quote, Profile, Research) in a project to build a $5 billion oil refinery in Guangdong in China, Kuwait’s state news agency KUNA reported on Tuesday.

Shell had hoped to gain a foothold in the domestic fuel market of the world’s second-largest energy consumer through the Guangdong plant, after an attempt to take a share in another refining project failed last year.

The refinery would be one of the largest joint venture investments in China, similar in size to the $5 billion refinery to be built by Exxon Mobil (XOM.N: Quote, Profile, Research) and Saudi Aramco in Fujian.

State-owned Kuwait Petroleum Corp. (KPC) and China’s largest refinery Sinopec received preliminary Chinese government approval for the Guangdong plant last year.

In August, Sinopec said Shell and U.S. Dow Chemical Co (DOW.N: Quote, Profile, Research) were also in talks to participate.

There were several reasons KPC no longer wanted Shell involved, including objections from China’s National Development and Reform Commission, KUNA reported, citing Chinese sources.

KPC was in talks on the project with BP, which had previously expressed interest, KUNA said.

Shell and BP spokesmen in London and Dow and Sinopec spokesmen officials in China all declined immediate comment.

WHY BP?

It was unclear why BP would be a better fit than Shell for the project. Analysts say Beijing is showing a preference toward teaming up with state-owned firms that can offer oil supply guarantees such as KPC, with less need for the technology or financing offered by oil majors such as Shell or BP.

“The issue has been dragging on for months,” said Kuwaiti energy analyst Kamel al-Harmi.

“The Chinese are objecting a foreign partner but KPC cannot do this alone. The question is what difference will BP make if they rejected Shell. It’s a similar competitor.”

Foreign firms have been lured by China’s huge retail market and double digit economic growth, though the state-controlled retail prices have crushed refining profit margins.

State price controls were one of the obstacles facing the project as they made it hard for international companies to make returns on investment in refining, KUNA said.

Chinese sources expected the refinery to start up in 2011 or later due to difficulties in negotiations with international oil firms, KUNA said. That is later than the previous 2010 target.

Any delays would push up the project cost, currently estimated at $5 billion, KUNA said. The refinery would have capacity of 260,000 barrels per day (bpd), KUNA added. Officials have previously said capacity could be as high as 350,000 bpd.

A KPC official visiting China expressed concern to local government officials about slow progress on the project, KUNA said. For their part, Chinese officials asked KPC to speed up the feasibility study for the plant.

The feasibility study would be completed in January and construction would start about a year later, KUNA said.

Guangdong will have petrochemical production capacity, and will mark U.S. chemical giant Dow’s return to the rapidly expanding Chinese petrochemical market. Guangdong will have capacity to produce a million tonnes a year of ethylene, aimed at meeting surging demand for plastics.

China and India have planned a host of new refining projects to meet growing fuel demand. Many projects worldwide have been delayed or cancelled due to spiralling costs.

(Additional reporting by Chen Aizhu in Beijing and Tom Bergin in London)

© Reuters 2006. All rights reserved.

 

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