Chinas West-East Pipeline Highlights Energy Problems

2004-01-15
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Natural gas began to flow through the mammoth 4,000-km West-East pipeline at the beginning of the year, but experts told RFA in a series of recent interviews that state-owned operator PetroChina is still struggling to deal with the project's crippling costs.

The first commercial deliveries began to flow along the U.S.$24 billion pipeline on Jan. 1, but authorities marked the event with little fanfare amid growing nationwide energy shortages. But very few companies have signed up to be supplied, partly because natural gas cannot be stored, and users must commit to a "take-or-pay" agreement, regardless of future energy needs.

"The economic, commercial viability of this project has always been put in question," says visiting scholar Edward Chow of the Carnegie Endowment for International Peace in Washington.

"What has happened so far proves that governments, particularly large, capable governments like China's, have the capacity to construct mega-projects, which they have done here," Chow told RFA special correspondent Michael Lelyveld.

"But whether it has an economic utility and is commercially viable or not is highly questionable," he added.

Much of the motivation for the project — ; the second biggest after the Three Gorges Dam — ; was to meet the demands of Shanghai residents for cleaner energy to improve air quality and reduce the use of high-polluting coal. The government also promoted the pipeline for political reasons, as part of its "Go West" campaign to develop the poorer regions and provinces in China's hinterland.

So far, the eastern half of the line is delivering gas from the Chanqing oilfield in China's Ordos Basin to the Shanghai municipal gas network in the district of Qingpu as a temporary step. Work is continuing on the western part of the line to reach the distant gas fields of Xinjiang, which will eventually supply Shanghai.

Officials say that gas is now reaching residential users in Shanghai, as well as major enterprises like the Shanghai Automotive Industry Corporation and Baosteel.

However, there has been no word about 46 letters of intent that PetroChina signed in 2001 with big potential gas buyers that were supposed to become binding contracts to underwrite the line. Without the "take-or-pay" contracts, PetroChina has no guarantee that its investment will produce gas sales. Many buyers, like Shanghai's power plants, have held back because gas prices are too high.

"The problem is, really it comes down to a lot of regulatory issues within China," Sam Dale, Singapore bureau chief for Petroleum Intelligence Weekly , told RFA. "There are still disputes from the power generation companies as to how much they are wanting to pay for the gas that they can burn to turn into power."

While the government allows different price bands for peak and off-peak electricity, it still does not do so for gas. Recent hints that the State Economic and Reform Commission may freeze utility charges for the next year to combat inflation give power producers even less incentive to produce more, still less invest in enormously capital-intensive gas-fired power generating units.

"The Shanghai pipeline has come onstream just as you have a much wider crisis across the whole energy sector," said Philip Andrews-Speed, China energy expert at the University of Dundee. "The lack of coherent energy policy and a long-term strategy of knowing where you're going has really been the underlying cause of where we are at the moment."

He said policymakers in Beijing had either ignored warnings for years that they needed to create a coordinated energy policy, or simply failed to make up their minds. One effect of this vacillation is that power plants are not being built fast enough because Chinese investors have no idea whether investments will pay.

"Until something is in place so that the players know what the rules are and know where they're going and within that framework there are incentives, until that happens, I think the crisis is only going to get worse," Andrews-Speed said.

Carnegie's Edward Chow agrees. "It will be very interesting to watch in the coming months whether the new political leadership that's only been in place for a year will similarly see this as an opportunity to finally implement some structural reform," he told RFA.

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