PetroChina may Proceed Alone with Gas Project

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Last updated at: (Beijing Time) Tuesday, August 12, 2003

PetroChina may Proceed Alone with Gas Project

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Fed up with tough talks and little headway on an US$8 billion gas trunkline, PetroChina is to decide by year-end whether to drop foreign partners and go it alone, a source close to the project said on Monday.

After more than a year of talks, PetroChina and a foreign consortium led by Royal/Dutch Shell remain deadlocked on the rate of return on the project, the biggest to date in China's rapidly growing energy sector.

The deal includes construction of a 4,000-kilometre trunkline from the barren northwestern region of Xinjiang across to the booming east coast and to jointly develop gas fields to feed the line.

"If the deal cannot be finalized by the end of this year when the east section of the pipeline starts formal operation, PetroChina may proceed with the project itself," the source said.

"The negotiations are now in a stalemate. The foreign side has asked the Chinese side to guarantee a 15 per cent return on investment, which the Chinese side can't do since each project has its risks."

Under a framework agreement signed in July 2002, PetroChina owns half of the West-to-East pipeline, while Shell, Exxon Mobil and Russia's Gazprom will each hold 15 per cent.

Chinese refiner Sinopec Corp will hold 5 per cent. A Sinopec spokesman said there was no change in the company's participation in the trunkline so far.

Beijing-based Shell spokesman Nick Wood denied the foreign partners, or the International Oil Companies (IOC), were holding out for any guarantee.

"The IOC has not asked for any guarantee for rate of return," Wood said in an email reply to Reuters. "Projects unfold and partners take a risk on how successful they are measured against the economics they have projected. There can be no guarantees."

He said Shell was still in discussions with PetroChina and remained committed to the project.

"Naturally our participation depends on the successful conclusion of negotiations to deliver a project that meets our investment criteria," he said, adding that Shell's criteria was at present stage confidential.

PetroChina plans to pump first gas into the eastern section of the line from Jingbian in northwest Shaanxi Province to Shanghai in October, with formal operation scheduled to begin at the end of this year.

Foreign concern has centred on the final selling price of the gas to domestic and industrial users and whether high prices will scare away potential buyers.

PetroChina has yet to secure a single take-or-pay supply contract for the gas although it has laid much of the trunkline.

An official with the Energy Bureau under China's State Development and Reform Commission (SDRC) said the government was working on a new pricing plan aimed at satisfying power plants, one main end-user of the western gas, and help break the deadlock.

The government is expected to issue the new pricing plan before the start-up of the line.

"Once the new gas price plan is put forward, we expect to see major breakthroughs. The new price plan has improved upon the original one after consulting different parties. It's a carefully deliberated plan," the SDRC Energy Bureau official said.

He declined to give details but said power generators, which account for about one-third of China's gas market, proposed that peak tariffs should be at three to five times non-peak charges.

"The spread in peak over non-peak is essential to these gas-fired plants," he said.

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