Shanghai Gas Project Loses Foreign Firms

2004-09-04
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On August 3, foreign investors led by the Dutch/Shell oil company announced the end of a joint venture with China to build a 4,000-kilometer gas pipeline. The pipeline, running from the western province of Xinjiang to the coastal city of Shanghai, has now been completed by the Chinese company PetroChina, though work on gas fields and distribution networks for cities on the pipeline route remains to be done.

Nick Wood, Shell spokesman in China, said, “We regret that we’re unable to reach an agreement with PetroChina on this project, but we look forward to future operations and opportunities.”

The breakdown of the joint venture has been blamed on China’s failure to assure foreign investors that they could turn a profit on the project. The project also faced questions, though, about political motives, environmental impact, and cost. Instead of dealing with these questions, China may have simply decided to push ahead on its own.

Project criticized on political, environmental grounds

From the start, analysts have criticized China’s motives in making the pipeline part of its “Develop the West” program. This, they say, has aimed at tightening Beijing’s grip over predominantly Muslim Xinjiang.

Foreign participation in the pipeline may also have been made more difficult after Shell asked the United Nations Development Project (UNDP) to write a social impact assessment for the project in 2002. Shell then announced that it would follow UNDP guidelines for the work. International criticism had already attached to another major construction project, the Three Gorges Dam, following complaints about environmental damage and the forced relocation of Chinese citizens.

Withdrawal of foreign participation from the pipeline project may now allow PetroChina to forge ahead, free from these concerns.

Chinese company “inflexible” in meeting investors’ concerns

Philip Andrews-Speed, a China energy expert at Scotland’s University of Dundee in Edinburgh, says that PetroChina may have never really wanted to work with foreign companies on the project. He believes that PetroChina agreed to form a joint venture only because the Chinese government ordered it to do so. In the end, he said, PetroChina proved inflexible in meeting foreign companies’ concerns.

“Right from the start,” he said, “it was clear that for a foreign company with costs of capital, this was going to be an extremely difficult project to make work commercially.”

British Petroleum understood this “pretty quickly” and got out, said Andrews-Speed. “Shell, Exxon, Gazprom and others stayed in negotiating until eventually the deal fell apart. But one has to ask to what extent was PetroChina really trying to make the joint venture deal work?”

“Were they,” Andrews-Speed asked, “reluctant brides dragged before the altar and quite happy to see the whole thing fall apart?”

Who will share the cost?

The project now seems likely to lose money, since the pipeline will probably carry only a fraction of the 12 billion cubic meters of gas per year originally planned. It is unclear, too, whether PetroChina, the Chinese government, or consumers will end up paying for the loss.

Foreign companies may also come to be more careful when investing in other projects. Jason Feer, bureau chief for Singapore’s Petroleum Argus industry newsletter, said that “reality” about the profits to be made in China has now set in.

“I think,” said Feer, “you’re seeing companies take a harder look at what kinds of returns they can actually expect instead of betting on some sort of illusory potential in the future.”

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