BP signing Chinese gas accord, may join gas pipeline

Sept. 18, 2000
BP affiliate BP China will sign a gas-marketing agreement this month with state oil company PetroChina Co. Ltd.

BP affiliate BP China will sign a gas-marketing agreement this month with state oil company PetroChina Co. Ltd. And the company is studying possible participation in a proposed $4.8 billion gas pipeline some 4,200 km across China.

BP will to take a 49% stake in the marketing joint venture. But the company said that much work remains before it can commit to the pipeline project itself.

Reports in August said that China would open up the pipeline project to tender by yearend. Additionally, it may allow foreign partners to take a majority stake in the project.

Western gas

The west-to-east gas pipeline project would provide 20 billion cu m/year (bcmy) of natural gas transportation capacity to Shanghai from the Tarim basin in the Xinjiang Uighur Autonomous Region, home to one of China's largest oil and natural gas reserves.

PetroChina, however, will allow a throughput of only 12 bcmy for 30 years, 10 bcm of which will be consumed in eastern China (OGJ, June 5, 2000, p. 63).

The government has reportedly verified 400 bcm of gas reserves in the Tarim basin, which is expected to be able to supply the pipeline with 12 bcmy for 13 years.

China expects to find another 600 bcm of reserves in the next 5 years in the 560,000-sq km, gas-prone basin to extend the supply to 30 years.

Although BP admits that it is interested in the 4,200-km west-east pipeline, it remains concerned about several aspects of the project, including market demand, the size of gas reserves, and development of the gas fields at Tarim.

Marketing experience

Meanwhile, the China Securities Bulletin last month quoted a senior PetroChina official as saying that PetroChina may delay construction of the pipeline to focus more heavily on marketing the gas in the likely joint venture with BP.

The government has asked PetroChina to start laying the pipeline in early 2001, with the first gas flows to begin by the end of 2003.

A government official said that technically, PetroChina was equal to the project but feels it lacks marketing experience and expertise. Gas purchase agreements must be lined up before construction can begin.

Analysts say that PetroChina's latest statements further reflect the state oil company's increasing emphasis on setting commercial priorities rather than blindly implementing government projects.

Another PetroChina official was quoted by the China Securities Bulletin as saying, "Foreign companies' reservations [about the project] were quite justified, as they saw it more as a political project. But to us, commercial viability comes first; the project has to make money."

PetroChina formed a marketing task team some months ago, hoping to secure purchase commitments from key consumers in east China.

Power generators, chemical plants, and homes in east China's Jiangsu, Zhejiang, Anhua, and Henan provinces and Shanghai will likely consume most of the gas from the pipeline.

A BP official echoed PetroChina's concerns over the timetable. "For a project of this size you need a very rapid build-up in gas demand. Clearly, PetroChina does not want to build the pipeline and then have to wait 10 years for demand to catch up.

"At the moment, gas demand in China is still relatively small, and the critical question is how to increase demand fast enough to make the pipeline economically viable," he said.

Gas-price system

The country's State Development Planning Commission says that it plans to announce a new natural gas price system to aid the growth of its gas industry. The commission says its objective is to raise natural gas consumption from the current 23 bcmy to 80 billion-100 bcmy over the next decade.

Under the proposals, pipeline transportation fees will be raised. Additionally, gas wellhead fees and gas processing fees will be combined and raised before the adoption in 2003 of a take-or-pay pricing mechanism.

BP has warned that the regulatory conditions and tariff structure will be keys to the project's success, especially if it is to attract foreign investors. It added that such investors would be closely monitoring two other aspects in particular:

  • What market conditions are likely to prevail and what the steps are to be taken to stimulate natural gas demand
  • The structure of the project itself.

The Chinese government has wanted to attract foreign investors to the project. In a reversal of its traditional policy of only allowing foreign involvement in the construction of pipelines but not in their operations, the government has now said that the project will be open to foreign investors without restriction on holding stakes-from the construction and operation of the pipeline to the development and running of city gas networks.

It has said that foreign investors will also receive exemptions and reductions in royalty fees paid on gas exploration and development projects, as well as tax exemptions on equipment imports.