People Daily | 10-09-2001

The State appears to have adjusted its timetable for the kick-off of the long-awaited west-east natural gas transmission project after concluding that more work is needed to tap the potential market and finalize joint venture talks with global oil conglomerates.

An official from the State Development Planning Commission said the start of the project, previously scheduled for the end of September, will be put off primarily due to unfinished co-operation talks with foreign firms.

"To show our respect to our foreign partners, we have given up our initial plan to kick off construction by the end of September.

"We will start construction after we finalize negotiations with our foreign partners, and we hope to officially launch construction by the year end,' the official told Business Weekly.

The project aims to build a 4,000-kilometre long pipeline to transport gas from west China's Tarim Basin in Xinjiang Uygur Autonomous Region to the coastal Shanghai in the east.

The official said experimental construction of some sections of the pipeline would soon start to ensure Shanghai will be able to use the first flow of natural gas from the pipeline by late 2003.

PetroChina, the nation's largest gas producer that controls the project, is currently negotiating with three consortia led by Exxon Mobil and Royal/Dutch Shell and Russia gas producer Gazprom to jointly build the US $5.6 billion pipeline, after BP withdrew from bidding earlier in September.

A BP spokesman said: "The demanding timetable and the advanced stage of the project definition prevented BP from making the unique contributions it likes to bring to all projects.'

Despite some analysts' speculation that BP's withdrawal may signal a lack of confidence in an adequate financial return for the project, PetroChina said
BP's move will not make other foreign companies reluctant to invest in the
project.

"Our negotiations with foreign firms are progressing smoothly, and we are
looking forward to a final result soon,' said Huang Yan, president of
PetroChina.

PetroChina "has been and will always act in the best interests of
shareholders. It will adhere to the principle that investment returns should
always exceed minimum requirements,' said an earlier statement of the
company following BP's pullout.

Problems remain
However, much remains to be done in order to realize what people believe the
project can bring.

One of the hottest issues was the price of natural gas to supply local
markets in eastern regions.

According to current "guide' gas prices, involving four provinces -- Henan
, Anhui ,Jiangsu ,Zhejiang -- and Shanghai Municipality that are expected to
receive the western gas, the price at the Shanghai terminal will be higher
than 1.3 yuan (15.7 US cents) per cubic metre and that of Zhejiang will be
even higher.

Many gas consumers vented their complaints about the unaffordable prices.

Li Weiyi, deputy general manager of Shanghai Natural Gas Pipeline Networks
Company (SNGC), said the price is "unacceptable' because it is beyond what
his company can afford.

"The potential market will be daunted by the unreasonable price, and that
will in the long run harm the fledgeling market,' said Li, adding that what
SNGC can afford is 1.0 to 1.1 yuan (12 to 13 US cents) per cubic metre.

Although most families will be able to afford the price for western gas,
other big consumers like power plants or industrial manufacturers will find
it a dismaying factor that hinders their unreserved gas use, Li said.

According to the feasibility study, power plants will account for nearly 50
per cent of the total natural gas use involved in the giant project, which
is expected to recoup its huge investment around 10 years after its start.

In expectation of some State preferential policies, many gas consumers thus
hold a wait-and-see attitude towards the thorny price issue.

They are also calling on PetroChina, which is anxious to verify the market
potential before the project's official kick-off, to significantly reduce
the project costs so as to lower the gas price to an affordable range.

PetroChina has signed letters of intent for gas sales with 46 companies in
supply-targeted eastern areas, and the combined annual gas consumption
preliminarily confirmed by the companies is expected to reach 14.6 billion
cubic metres by 2007 and 18.2 billion cubic metres by 2010.

However, few consumers have signed take-or-pay contracts with PetroChina
which would allow the company to fix the amount of gas sales at a set price.

Analysts said if these deals cannot be finalized, and if the actual gas
consumption in eastern areas fails to reach 12 billion cubic metres by 2008
-- the break-even point for the project to cover its costs -- the
much-vaunted project will turn out to be a money-losing one.

As a result, the SDPC official urged both PetroChina and consumers to
compromise to settle down the consumption amount.

"The price is not at all unreasonably unacceptable and it still has some
scope for reduction because of allowable tax deductions.

"We should abide by economic rules in terms of gas use...some industrial
projects like Baosteel's stainless steel production do have a big appetite
for western gas and they can afford it,' said the official.

"It is senseless to focus our attention only on those power plants (planned
to account for a major part of gas consumption)...our standpoint is that gas
use priority should go to the needy sectors and those that can afford it.'

Analysts said the government would, by any means, proceed the project, as
the nation has pinned its hopes on the project to boost the development of
its resource-rich but economically undersized western regions where
one-third of China's population dwell.

Meanwhile, China also hopes the pipeline would help promote its fledgeling
natural gas industry, and reduce its huge oil imports and heavy reliance on
coal.

China is ambitious to double its annual production of natural gas from 27
billion cubic metres in 2000 to 50 billion cubic metres in 2005. By 2010,
natural gas would take up 10 per cent in China's energy consumption mix,
versus its current 2.1 per cent.