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BP’s hopes for China oil growth

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By Ed Crooks

Published: December 11 2008 02:00 | Last updated: December 11 2008 02:00

BP wants to expand its investment in China “by several times”, its chief executive has said, setting out his ambitions to expand in the country expected to undergo the world’s biggest increase in demand for oil over the next two decades.

Tony Hayward, who took over as BP’s chief executive last year, said in a speech in Beijing that the company could “help China in its endeavour of energy security by energy diversity”.

BP, Europe’s biggest oil group after Royal Dutch Shell, has invested $4.6bn (£3.1bn) in China, but like other western oil companies including Shell, ExxonMobil of the US and France’s Total has made only limited progress.

Mr Hayward’s comments, made at the end of last month but posted on BP’s China website this week, show he is aiming for a far greater presence in China “over the medium term”.

China has shown some reciprocal interest in the British oil group this year. It emerged in April that the Chinese government had picked up a BP stake of almost 1 per cent.

BP said yesterday that Mr Hayward was setting out an “aspiration” rather than a firm investment programme.

The company has explored closer ties before. In 2005, BP sought a strategic partnership with Sinopec, the listed arm of China’s second-biggest oil company, which could have transformed its presence in the country.

The talks failed to reach agreement on such a bold move, however, and the following year Sinopec ruled out BP taking a substantial minority stake.

In spite of that setback, BP has continued to increase its investment in China.

Its biggest single project is the Secco plastics plant in Shanghai, a joint venture with Sinopec and the Shanghai Petrochemical Company. It has other petrochemicals facilities, retail joint ventures with Sinopec and PetroChina, the biggest listed Chinese oil company, factories for solar panels and a 30 per cent stake in a terminal for receiving liquefied natural gas. It even owns a stake in a project producing gas to sell in Hong Kong.

BP is also collaborating with China on research and development, last month launching a new $70m R&D centre with the Chinese Academy of Science – the occasion for Mr Hayward’s visit.

The new centre will focus on commercialising less polluting ways to use China’s vast coal reserves, including power stations that capture and store their carbon dioxide emissions and processes to transform coal into liquid fuels or substitutes for oil products.

However, all of these operations are still relatively modest given the scale of BP, which is worth about $140bn, and the size of the Chinese market and the country’s 1.33bn population

The International Energy Agency, the developed countries’ watchdog, predicts China will soon overtake the US as the world’s biggest consumer of energy. By 2030, the IEA believes, China will have more cars than North America and, unless there is a change in its energy policies, its oil consumption will be almost as high as the US.

On the same “business as usual” basis, more than 40 per cent of all the forecast global increase in oil demand by 2030 will come from China.

This makes it impossible for any global oil and gas group to ignore China.

Progress has been undramatic so far. Exxon is building a refinery and petrochemicals plant in a joint venture with Sinopec and Saudi Aramco. Shell, PetroChina and Qatar Petroleum have been exploring a similar joint venture. Total has a retail joint venture with Sinochem. Along with Shell and Chevron, Total has also been looking at possible gas production projects.

However, highly regulated markets – even after recent reforms that should help refiners stay profitable – and assertive national companies with international ambitions of their own make China a very difficult country in which to operate.

Mr Hayward has pitched joint ventures, saying “these partnerships are based on one of the great motivating forces in human affairs: genuine mutual advantage”.

But while the advantage for western companies is clear, he will have to use all his powers of persuasion to make China believe the advantage is mutual.

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