Gasline And Projected Use China*

August 16, 2001

Business and Finance - Asia

Major Energy Firms Vie

For China's Pipeline Plan

By PETER WONACOTT

Staff Reporter of THE WALL STREET JOURNAL

BEIJING -- The world's biggest energy firms are circling for a piece of China's West-East pipeline project, despite economic questions that loom as large as the $18 billion price tag.

In the next two weeks, industry executives expect to step up negotiations with state-owned PetroChina Co., the manager of the natural-gas pipeline in charge of choosing foreign partners. The parties aim to strike a framework pact in September for a joint venture that, if implemented, would mark a ringing endorsement for a project long considered more political symbol than commercial venture.

Even by the Brobdingnagian standards of Chinese infrastructure, the project is big. Planners want to tap hard-to-find reserves in Xinjiang's remote Tarim basin and transport them through nine provinces, municipalities and autonomous regions -- crossing an estimated 40 rivers -- before the pipeline ends 2,500 miles away in glitzy Shanghai. In cost, too, the pipeline has few rivals. One is China's other megaproject: the Three Gorges Dam, with predicted investment of $22 billion before it is finished in 2009. PetroChina wants to start construction on the pipeline this year, wrapping up in 2004.

With such scale and speed in mind, Beijing has reached out for help. "This thing is so massive that, even with a super oil major, it's going to be tough for PetroChina to pull off," said a senior executive whose company is involved in the pipeline talks.

Unlike the controversial dam, though, the pipeline has drawn huge foreign interest. A decision to open all parts of the project to bidders, even potentially lucrative gas development, marked a change from what critics said was China's practice -- highlighted by years of disappointing oil exploration in Xinjiang -- of giving foreigners only the least promising patches of geology.

Bidding to participate is a slew of Western oil giants. Units of Exxon Mobil Corp. and BP PLC have formed separate consortiums. And Shell International Gas Ltd., a subsidiary of Royal/Dutch Shell Group, may link up with Russian gas monopoly OAO Gazprom -- a partnership that some analysts believe could pave the way to pump gas into China from Central Asia.

0Fueling Growth: Two pictures of China's gas demand.

For each, even a relatively minor role in the pipeline could mean a billion-dollar bet. That, coupled with the project's complexity, has given a typically brash bunch of oilmen pause. "They'll divide and rule, squeeze the terms as hard as they can," complains another senior executive, describing his firm's negotiations with PetroChina. "But you can't throw away the basis of economics just because this is a strategic investment."

PetroChina didn't respond to faxed questions about the pipeline. The company is a unit of state-run China National Petroleum Corp., which itself grew out of the now-defunct Ministry of Petroleum Industry. PetroChina has tried to distance itself from its government lineage, however. After last year's stock listing in New York and Hong Kong, PetroChina cut costs, streamlined management and raked in profits -- revolutionary for the state-dominated industry.

Yet the pipeline project is regarded by many as a sign of how tightly PetroChina's business is intertwined with policy goals. For one thing, Beijing is keen to spread the use of natural gas, reducing reliance on polluting coal and offsetting rising oil imports. In the next decade, the government hopes natural gas will constitute 10% of the energy mix, up from 2.1% now. That will require great leaps in infrastructure and customers, which for the most part aren't yet there.

China's leaders also hope the pipeline accomplishes something grander: spurring investment in the country's vast but underdeveloped interior. The pipeline is a cornerstone of China's "Develop the West" campaign, political payback for the 20 years of rapid growth in China's coastal cities.

While the campaign has helped sustain the project's momentum, it has done little to ease concern about profits. Among the biggest questions is how much gas lies beneath a field PetroChina calls the pipeline's backbone, Kela 2. Though PetroChina estimates the field has an enormous 250.6 billion cubic meters of reserves, foreign executives say they aren't so sure. One noted similar seismic testing, by different companies, produced widely diverging results.

Downstream, PetroChina has boasted signing dozens of gas-purchase agreements. But there, too, it enjoys few guarantees. Coal remains cheaper, putting big customers such as gas-fired power plants at a disadvantage. Meanwhile, Shanghai, PetroChina's biggest potential market, faces a surfeit of energy as gas from projects in the East China Sea and inexpensive hydropower from the Three Gorges Dam flow into the city.

Says one industry executive: "It's going to be hard to get the gas down there at a price everybody says they can pay."

* * *

Fueling Growth

Two pictures of China's gas demand, in billions of cubic meters

China National Petroleum Corp.'s forecast:

Industry 2005 2010

Power generation 14.7 33.8

Residential/cmmrcl 16.9 32

Industrial fuel 18.4 26.2

Chemical 14.6 20.1

Total 64.5 112.1

Cambridge Energy Research Associates' forecast:

Industry 2005 2010

Industrial 15.4 22.7

Electric power 4.4 17.5

Residential/cmmrcl 7.2 11.2

Feedstocks 7.5 8.6

Transportation 0.1 0.2

Other 5.0 5.7

Total 39.6 65.8

Write to Peter Wonacott at peter.wonacott@awsj.com1

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