BP studies participation in Chinese gas pipeline

A senior official at BP affiliate BP China said that the oil major is on track to sign a gas marketing agreement with state oil company PetroChina Co. Ltd. next month, and the company is continuing to �very seriously study� possible participation in the construction of a proposed $4.8 billion gas pipeline running some 4,200 km across China (OGJ Online, Aug. 7, 2000).


TOKYO�A senior official at BP affiliate BP China said that the oil major is on track to sign a gas marketing agreement with state oil company PetroChina Co. Ltd. next month, and the company is continuing to �very seriously study� possible participation in the construction of a proposed $4.8 billion gas pipeline running some 4,200 km across China (OGJ Online, Aug. 7, 2000).

BP is expected to take a 49% stake in the marketing joint venture. However, it warns that much work has yet to be done before it is prepared to commit to the pipeline project itself.

Reports say that China will open the pipeline project up to tender by the end of the year. Additionally, it is expected to allow foreign partners to take a majority stake in the project.

The west-east gas pipeline project is expected to provide 20 billion cu m (bcm)/year 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.

However, PetroChina will allow a throughput of only 12 bcm/year for 30 years, of which 10 bcm will be for consumption 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 bcm/year for 13 years.

China expects to locate 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 is understood that the multinational operator remains concerned about a number of aspects of the project, including market demand, the size of gas reserves, and the development of the gas fields at Tarim. �We need to know whether this is to be an upstream project, a pipeline project, or both."

PetroChina desires BP's marketing experience

Meanwhile, a senior PetroChina official has been quoted in the China Securities Bulletin as saying that PetroChina may delay the construction of the pipeline to focus more heavily on marketing the gas in the likely joint venture with BP. "The pipeline construction won't be a rush...Top priority would be finding the gas buyers."

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.

"Technically, PetroChina will be up to the project, but marketing is our weak point," said the Beijing-based official. "Until we secure gas purchase agreements, rushing the construction makes little sense."

Analysts say that PetroChina's latest statements mark a further reflection of the state oil giant's increasing emphasis on setting commercial priorities rather than blindly implementing government projects.

"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," a second PetroChina official was quoted by the China Securities Bulletin as saying.

PetroChina formed a marketing task team a few 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 are expected to consume most of the gas from the pipeline.

"It was an extremely tough job. We don't have much marketing experience...We are very much ready to work with BP," said one PetroChina marketing official.

BP seems to share PetroChina's concerns over the project�s 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," pointed out a BP official.

New gas price system

The country�s State Development Planning Commission says that it plans to shortly 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 level of 23 bcm/year to 80 billion-100 bcm/year 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 warns that the regulatory conditions and tariff structure will be a key to the project's success, especially if it is to attract foreign investors. It adds that such investors will be closely monitoring two other aspects in particular: Firstly, what the market conditions are likely to be like and the steps being taken to stimulate natural gas demand, and secondly, the structure of the project itself. "There seems to currently be confusion as to whether this is an upstream project, a pipeline project or both."

The Chinese government has been keen to woo 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 running and operating them, it now says 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 says that foreign investors will also get exemptions and reductions in royalty fees paid on gas exploration and development projects, as well as tax exemptions on equipment imports.

More in Pipelines & Transportation