Reuters | Apr 18, 2001

PetroChina is trying to lure the world's top three oil majors to invest in a $5.4 billion gas trunkline by offering equity production at one of China's largest gas fields, industry officials said on Wednesday.

Sources said PetroChina was seeking government approval to award production sharing contracts at the Kela-2 field. An alternative to attract investment could be service contracts, they said.

If approved, it would be the first time that China's largest oil company has
opened such a major field to foreign firms.

"We are waiting for the government approval at this stage. We will take an active role stepping up joint production (of Kela-2)," said a PetroChina official.

PetroChina is hoping to entice Exxon Mobil , BP and Royal/Dutch Shell Group to participate in a 4,200-kilometer (2,610-mile) pipeline linking China's central Asian region of Xinjiang to Shanghai.

"The foreign majors think the pipeline is not economically attractive.
Kela-2 gas field serves as a preferential condition to bring them in," a
Beijing-based senior industry official close to PetroChina told Reuters by
telephone.

Kela-2 is one of the main fields in Xinjiang's Tarim Basin, which will feed
into the proposed trunkline. Industry sources said PetroChina's plan to
offer Kela-2 gas highlighted the company's determination to keep the
government-backed pipeline project on track.

Senior Petrochina officials have repeatedly said that construction of the
line would start in October with gas expected to land in Shanghai in 2003.
The company estimates Kela-2 proven gas reserves at 250.6 billion cubic
meters (bcm) and has targeted annual production at 10 bcm in about 2004.

PetroChina has been the dominant player in China's onshore upstream sector and has rarely awarded production sharing contracts to foreign firms.

A senior PetroChina official said last month that the giant pipeline project
should break even three years after it comes into operation.

Sources at foreign oil majors, however, say six to nine years is a more
normal period before projects of such size begin to turn in profits.
They said PetroChina's move to open Kela-2 was encouraging, but the value of field would depend on the price of the gas when it was sold to the market.

"A very essential issue would be the gas price," said a Beijing-based
executive with one of the three oil majors.

PetroChina aims to sign take-or-pay contracts with key customers before
pipeline construction kicks off.

But sources at the oil majors are skeptical as it would be the first time
such supply contracts have been used in China's onshore oil and gas sector.

"The contract is a brand new thing to Chinese users. The central government will have to play a very important part brokering the prices," said an oil major executive.

"Otherwise it will be too risky (for us) to step in," she said.

PetroChina inked in February initial gas supply deals with 33 customers, most of which were urban gas projects and power generators.