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China launches massive gas pipeline
campaign
China gas -
seeking
a great leap forward
Oil&Gas Journal Volume
98, Issue 23 (Jun 05, 2000)
Special Report
China
now sees natural gas as a major industry. China
decided to capitalize on its gas resources in order to ease pollution
and
provide stimulus for economic growth for the next 10 years.
The government plans to boost gas consumption from the current 24
billion
cu m/year (bcm/year) to 50 bcm/year in 2005 and further to 100 bcm/year
in 2010. The plan involves enormous capital input and offers
businesses
to Chinese and foreign investors ranging from natural gas exploration
and
development to downstream operations, such as gas utility equipment
services.
Of the entire gas business chain, from upstream through midstream to
downstream,
China has placed top priority on the construction of a gas
infrastructure-gas
pipeline construction in particular-to pave the way for the large-scale
development of a natural gas industry.
Gas pipeline push
As
a first step to boost gas utilization, China has included
gas pipeline construction as part of an infrastructure construction
program
in its next 5-year planning period (2001-05).
The government has launched a
massive gas pipeline construction
spree to link gas fields in western China's Tarim, Qaidam, and Ordos
basins
with gas markets in eastern China. The western part of China holds
about
22 quadrillion cu m of natural gas resources, accounting for 58% of the
national total.
Currently,
China's gas pipeline network is still in the
initial stage of development. The bulk of China's natural gas is
transported
to areas close to gas fields for consumption in chemical plants.
The most extensive gas
pipeline network has been built
in southwestern China's Sichuan Province, where the network consists of
8,770 km of pipeline carrying gas from Sichuan gas fields to chemical
plants
as well as to household consumers in the province and in the
neighboring
provinces of Yunnan and Guizhou. Sichuan is currently China's largest
gas
production center, with gas output in 1999 reaching 7.6 bcm, accounting
for 33% of the national total.
In addition to Sichuan, China
is now operating two major
long-haul gas pipelines. The Jingbian-Beijing pipeline is China's first
long-haul onshore gas pipeline. The 864-km pipeline was completed in
1997,
with annual throughput capacity of 3 bcm. The gas supply for the
pipeline
is from the Changqing oil and gas field for industrial and household
consumption
in Beijing as well as in Tianjin in northern China.
The other one is a pipeline
in the South China Sea, linking
ARCO's Ya 13-1 gas field and a power plant in Hong Kong. The 778-km
pipeline
has been in operation since 1996. It moves 2.9 bcm/year of gas to Hong
Kong and 520 million cu m/year (MMcm) to Hainan province.
Foreign investment
However,
the existing pipeline infrastructure is far from
adequate to meet the needs of both the upstream (exploration and
production)
and downstream (consumption) sectors. The absence of a substantial
pipeline
system has also caused potential investors to be ambivalent about the
prospects
of China's gas business.
China encourages
foreign participation in
gas pipeline construction, but many foreign companies are interested in
gas exploration and production and marketing. Without being able to
secure
enough gas reserves and an adequate gas market, foreign companies are
not
eager to incur the risk of pipeline construction.
The largest
foreign participant in China's
onshore gas sector is Royal Dutch/ Shell. Last September, Shell signed
a $3 billion contract with China National Petroleum Corp. to jointly
explore
and develop gas resource in northwestern China's Ordos basin. The
contract allows Shell to tap gas reserves on the Changbei block, which
covers 1,600 sq km, build a gas pipeline, and establish a sales
network. The pipeline will extend through Inner Mongolia,
Beijing, Tianjin, Hebei
Province, and Shandong Province. The Changbei project is the
first onshore upstream petroleum project initiated by Shell in China
and
the largest project launched by CNPC with foreign investors. Upon
completion,
the project will supply 3 bcm/year of natural gas to eastern China for
20 years. The project is expected to start up in 2004.
Last year, Enron Development
Corp. and CNPC undertook
a plan to build a 503-km pipeline to move 3 bcm/year of gas from
Sichuan's
Zhongxian area to Hubei Province. Enron took a 45% share of the 1.9
billion
yuan project, expected completion this year.
BP Amoco PLC is another major
that has shown interest
in China's gas business, but it is not likely to engage in domestic gas
pipeline construction. BP Amoco is more interested in the retail gas
sector
in eastern China. As part of the concession to encourage BP
Amoco to invest in the initial public offering of PetroChina Co. Ltd.,
a unit of CNPC, PetroChina has agreed to set up a joint venture with BP
Amoco to market the gas produced in Xinjiang's Tarim basin in areas
around
Shanghai in eastern China. BP Amoco contributed up to 20% to
PetroChina's
$3 billion IPO. BP Amoco's new position with PetroChina will
enable it to form a joint gas-marketing venture as well as to build or
acquire as many as 150 service stations in China over the next year.
Although China
encourages foreign participation
in domestic gas transmission pipeline construction, the country still
bans
in principle foreign investment in town-gas (local distribution
company)
pipeline construction. The government plans to lift the ban
and select a few cities to allow foreign companies to become involved
in
China's LDC pipeline grid business on a build-operate-transfer basis,
in
order to attract foreign capital and technology.
Xinjiang-Shanghai pipeline
<>China is now embarking on
several major gas pipeline construction
projects (see map).
The centerpiece of the construction campaign is one that
links Xinjiang with Shanghai. The 811-mm diameter, 4,212-km
pipeline will pass through 15 major cities before reaching Shanghai.
The
pipeline will have a designed capacity of 20 bcm/year. The
15 cities are Korla, Turpan, Shanshan, and Hami in Xinjiang; Liuyuan,
Zhangye,
Wuwei, Lanzhou, Dingxi, and Liquan in Gansu; Zhengzhou and Xinyang in
Henan;
Hefei in Anhui; and Nanjing and Changzhou in Jiangsu.
PetroChina submitted its
project proposal
to the State Development Planning Commission (SDPC) for approval last
September
targeting completion of engineering design this year.
The construction will be
divided into two
phases. Construction of the 1,581-km first section from Tarim to
Jingbian
in northwest China's Shaanxi province is to start next year for
completion
in 2002.
Construction of the second, 2,586-km
section from Jingbian
to Shanghai is to start in 2002 for completion in 2003.
However, PetroChina will
allow a throughput
of only 12 bcm/year for 30 years, of which 10 bcm will be for
consumption
in eastern China-including Shanghai and Jiangsu, Zhejiang, and Anhui
provinces-and
2 bcm will be designated for consumption in locales en route.
PetroChina
is prepared to scale down the initial pipeline throughput to four
bcm/year,
in case the market in eastern China is ready before 2004.
The government stresses the simultaneous
development of gas resources, pipeline, and downstream projects, but
PetroChina
cannot offer any assurances that all the downstream gas projects will
be
ready by the time the pipeline construction is completed.
The complexity
of building natural gas-based
projects, including power plants and LDC networks, centers on
extensively
aligning efforts of multi-government offices and financial
institutions,
because such projects will mean shifting away from an existing energy
system
based on coal-fired power plants and liquid fuels for home heating
facilities.
Based on the
pipeline operation economics
and purchasing capacity of the end-users in Shanghai, SDPC is likely to
set the price of Xinjiang gas at about 1.3 yuan/cu m at the Shanghai
city
gate.
All these related
projects, including gas exploration
and development in Tarim basin, the pipeline, and downstream projects,
are expected to cost a total of about 120 billion yuan, including 38
billion
for the pipeline construction and 60 billion for the downstream
projects.
Chinese Premier Zhu Rongji
said in March
in Beijing that foreign investors can take a majority stake in the
pipeline
and that foreign companies are allowed to control the management of it.
China's willingness to
allow foreign companies
to control the pipeline operation indicates China's urgency to share
foreign
management expertise.
However, foreign companies are lukewarm
to the pipeline construction proposal. They are more interested in gas
production at Tarim and retail gas sales in eastern China.
Moreover, few companies are willing to invest in the project without a
local partner, given the risks involved and huge capital requirement.
China's
preference for foreign involvement
in the pipeline is to form a joint-venture consortium between foreign
and
local companies. Some companies are interested in involvement in the
retail
part of the Xinjiang-Shanghai gas business chain, while others are
interested
in gas exploration and production in the Tarim basin, the gas supply
source
for the pipeline.
PetroChina has ruled out the
possibility of allowing
foreign companies to become involved in gas production in Tarim,
because
the company confirmed enough reserves for the pipeline. PetroChina
mostly
encourages foreign companies to participate in exploration that
involves
risk. PetroChina has proved more than 400 bcm of natural gas reserves
in
the Tarim basin. The company is trying to discover more this year.
Other western
pipelines
In
another major example of the gas infrastructure build-up,
PetroChina started building another natural gas pipeline in
northwestern
China in April. The pipeline will extend 953 km from the Sebei gas
fields
in Qinghai Province to Xining, capital of Qinghai Province, and
Lanzhou,
capital of Gansu Province. The pipeline will have an annual
transportation
capacity of 3-5 bcm of gas, of which 1.7 bcm will be for consumption in
Xining and 2.8 bcm will be for Gansu.
PetroChina
has decided to spend 600 million yuan on natural
gas exploration and production this year in the Sebei fields. The Sebei
fields cover 7,000 sq km and have gas reserves estimated collectively
at
500 bcm. The fields are in the eastern part of the 120,000 sq km Qaidam
basin, where PetroChina says gas reserves total 900 bcm.
PetroChina
plans to produce 5 bcm/year of natural gas in the basin by 2005.
Qaidam's
gas production last year was 360 million cu m, up 34% on the year.
Meanwhile,
PetroChina is moving a step closer to building
a natural gas pipeline from Sichuan Province in southwest China to
Wuhan,
capital of Hubei Province, in central China. China International
Engineering
Consulting Corp. has completed its assessment of the feasibility study
done by PetroChina on the 711-mm diameter, 700-km pipeline and has
submitted
the project proposal to SDPC for approval. The pipeline is scheduled
for
completion in 2002. Sichuan has proven gas reserves of 589.5 bcm, 56%
of
which are in the eastern part of the province. Gas from Sichuan will
supply
Wuhan for 30 years at a required 1-1.2 bcm/year.
In addition to Wuhan, the
Sichuan gas will also supply
10 cities in Hubei: Yichang, Jingzhou, Jingmen, Xiangfan, Lichuan,
Enshi,
Zhijiang, Qianjiang, Xiantao, and Yidu. Gas demand in
Hubei province is estimated to rise to 650 MMcm in 2005 and to 1.5 bcm
in 2010. From Wuhan, the pipeline will be extended further after 2002
to
the Yangtze River delta region, including Shanghai and the provinces of
Jiangsu and Zhejiang in eastern China.
Also under construction is
a 53.6-km pipeline from Xi'an,
the capital of Shaanxi Province, to Weinan, which is north of Xi'an.
The
59 million yuan pipeline will have an annual delivery capacity of 380
MMcm
of natural gas. This pipeline will transport natural gas produced from
Changqing oil and gas field. Xi'an has an existing gas pipeline that
connects
the city with Jingbian, the site of the Changqing oil and gas field.
The
pipeline has an annual delivery capacity of 400 MMcm.
In addition, in the west, China
completed a major natural
gas pipeline linking Jingbian to Baoji via Xi'an and Xianyang in
northwest
China last September. The pipeline extends 147 km between the two
industrial
cities. It moves gas produced from Changqing field for local industrial
and residential consumption. Changqing, in the Ordos basin, holds
proven
gas reserves of 310 bcm as of the end of 1998. Plans call for the field
to increase proven gas reserves by another 120 bcm by 2003.
China has also decided to
build a natural gas pipeline
from Changqing gas field in northwest China to Inner Mongolia in
north-central
China. The pipeline will extend 471 km eastward from Ushen County in
western
Inner Mongolia and terminate in Huhhot. The pipeline, with an annual
capacity
of one bcm, is slated for completion by the end of this year.
In
a separate development, China's Hainan province is
seeking foreign investment to jointly build and operate the second and
third sections of an integrated natural gas pipeline grid in order to
capitalize
on the use of gas produced from the South China Sea. The
700-km
pipeline will skirt the island province, passing through 12 cities and
counties from Shanya to Qionghai. The 2.2 billion yuan pipeline project
is divided into three sections, with the first section brought into
operation
in 1996. The three sections will have a combined transportation
capacity
of 3-5 bcm/year of gas.
Foreign companies can
participate in the
construction of the second and third sections through direct investment
or technology transfer.
The first section, spanning 116 km from
Shanya to Dongfang,
has the capacity to transport 500-700 MMcm/year of gas. This section
has
been transporting gas produced from the Ya (Yacheng) 13-1 gas field in
the South China Sea to an ammonia-urea plant since 1996.
The second section, spanning 300 km
from Dongfang to
Haikou, the provincial capital, will transport gas from the offshore
Dongfang
1-1 gas field, currently under development by China National Offshore
Oil
Corp. (CNOOC), to residential and industrial consumers along the route.
It will have an annual delivery capacity of 2.8 bcm.
Construction of the second section
began in 1999, and
its completion is scheduled for 2002, 2 years later than originally
scheduled
because of a lack of funds and a delay in the gas field's development.
Hainan doesn't have a timetable for
construction of the
third section of the pipeline, which has a design length of 300 km,
extending
from Shanya to Qionghai. Construction of this section is still pending
approval from the central government. This section will
transport
gas from Ledong 15-1 gas field in the South China Sea, which is
currently
being delineated by CNOOC and ARCO (recently acquired by BP
Amoco).
CNOOC produced 4.39 bcm of natural gas
in 1999, 70% of
which was produced from Ya 13-1 field, which is currently operated by
CNOOC
and ARCO.
At Dongfang 1-1, CNOOC has proven gas
reserves of 100
bcm. The field's start-up is expected in 2002.
Transnational
pipelines
For
China's energy security reasons and to push earlier
development of natural gas resources in host countries, China and some
central and northern Asian countries are in talks over building several
transnational gas pipelines from Russia, Kazakhstan, and Turkmenistan
to
China.
At
least five such pipeline proposals are now in consideration
by the Chinese government.
Of the five, three would
extend from the
western of part of central Asia and terminate at Shanshan in
northwestern
China's Xinjiang region.
The first of the three is
the 1,865-km gas
pipeline from Western Siberia to Shanshan. The $3.62 billion pipeline
would
be able to transport 30 bcm/year of gas to China.
The second would extend from
Kazakhstan's supergiant
Karachaganak gas, condensate, and oil field to Shanshan.
The line would extend 3,370 km and be
able to move 25
bcm/year of gas to China. Karachaganak has 1.3 trillion cu m of gas
reserves.
The last of the three would extend
2,150 km from Turkmenistan
to Shanshan and is designed to transport 25 bcm/year of gas at a cost
of
about $4.7 billion.
The other two would extend from eastern
Russia to northeastern
and northern China. One of the two links is Sakhalin I in
Russia
to Shenyang in northeastern China. The 2,416-km pipeline is designed to
transport 5 bcm/year of gas for consumption in northeastern China,
including
Heilongjiang, Jilin, and Liaoning provinces. Sakhalin I holds about 250
bcm of gas reserves.
The other would extend from Irkutsk's
Kovyktinskoye field
to northern China.
Of the five gas pipelines under
discussion, this one
is most likely to materialize.
China and Russia are in the
midst of completing a feasibility
study for the pipeline, which would extend from Irkutsk to China and
then
to South Korea (OGJ, May 15, 2000, p. 74). BP Amoco has a 25% stake in
Kovyktinskoye field, which has gas reserves estimated at 1.4 trillion
cu
m.
China
and Russia now differ on the routing of the pipeline.
Russia suggests the line should enter
China via Mongolia
because this route is shorter, while China insists it go directly to
northeastern
China via Manzhouli.
Roughly, the $12-13 billion pipeline
would extend 4,000
km from Russia's Irkutsk basin gas fields in eastern Siberia to
northern
China.
BP Amoco and its partner, the
consortium Rusia Petroleum,
target 2005 for the arrival of first gas in China. China expects the
pipeline
to transport 20-25 bcm/year of gas to China, while South Korea expects
to receive 10 bcm/year.
Russia,
China, and South Korea will soon sign a trilateral
contact to extend a natural gas pipeline from Russia via China to South
Korea.
China said it will build the
Sino-Russian gas pipeline
along with a 2,400-km crude pipeline that is to extend from Angarsk in
eastern Siberia to northeastern China in order to minimize costs and
land
use.
According to an agreement
signed in March by Russian
Minister of Fuel and Energy Victor Kalyuzhnyi and Zeng Peiyan, minister
for China's SDPC, China and Russia have agreed to begin building the
crude
pipeline in 2003, and completion is scheduled in 2005.
About
1,630 km of the pipeline will be built within Russia at a cost of $950
million, while the remainder will be built in China at a cost of $650
million.
However,
just as with the gas pipeline, China and Russia
still haven't agreed on the routing of the pipeline, with the Russians
insisting on cutting the pipeline's distance by running it through
Mongolia,
with the Chinese calling for skipping Mongolia for security
reasons.
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