Oil Giants Plan for Natural Gas Price Rise Risks placed before
CNOOC


With the promotion of LNG (liquefied natural gas) projects, the
appeal made by CNOOC for natural gas price rise can be easily
understood. One of CNOOC senior officials says that “we decide
to receive the first shipment of LNG from the northwest
continental shelf of Australia on April 28, 2006.” In the
opinion of this senior official, however, at the time of
importing the first shipment of LNG, CNOOC is also faced with
a trial of huge risks.
   The greatest risks in the import of LNG include the “payment
without negotiation”, the ability of management and the
predicted economics of projects. The “payment without
negotiation” means that even if the consumption of natural gas
in users fails to reach the contract amount, payment still has
to be paid to natural gas suppliers according to the contract
amount.
   In Guangdong LNG project, a 25-year contract with “payment
without negotiation” was signed with Australia according to
international conventions and rules.
   Experts say that “the fuel gas market demand in local areas
is built up slowly and can not meet the upstream requirement of
“payment without negotiation” in the initial period.”
   Local areas still lack a full understanding of the mode of
“payment without negotiation”. The import of LNG is in most
cases a government behavior. Without clear-cut provisions in
policies or agreements in advance, therefore, it would be hard
to handle disputes. According to experts from China Energy Net,
the establishment of the rule of “payment without negotiation”
is a precondition for CNOOC to make a bold development of LNG
projects.
   Behind the desire of CNOOC to implement the rule of “payment
without negotiation” and realize the risk transmission of the
industrial chain is of course the pursuit after interests.
   Although the natural gas business only holds a small
proportion in the total sales revenue in CNOOC, it has already
been regarded as a key item in the strategic development. As a
matter of fact, CNOOC has become the leader in the construction
of LNG projects in coastal areas.
   The National Development and Reform Commission held a natural
gas working conference in Qingdao in June 2005. It was decided
that 10 LNG projects, basically one project in one province,
would be constructed in China as the first group. CNOOC would
construct 5 projects in the south of the Yangtze River. CNPC and
Sinopec would construct 5 projects in the north of the Yangtze
River.
   CNOOC has already launched the construction of LNG projects
in Guangdong, Fujian, Zhejiang, Shanghai and Hainan provinces.
    Guangdong LNG project is the first LNG project in China. The
design capacity is 3.7 million t/a in the first phase and 7.0
million t/a in the second phase. The project is planned to be
completed in June 2006.
    The first phase of Fujian LNG receiving station and
transmission pipeline project has a design capacity of 2.6
million t/a and will be completed at the end of 2007. The second
phase will have a design capacity of 5.0 million t/a and will
be completed in 2012. (CCR2005, No. 13)
    The design capacity of Zhejiang LNG receiving station joint
venture project is 3.0 million t/a in the first phase and will
be expanded to 6.0 million t/a in the second phase. (CCR2005,
No. 5)
    The design capacity of Shanghai LNG receiving station
project is 6.0 million t/a. The project will be executed in two
phases. The first phase is planned to be completed during the
Eleventh Five-year Plan period (2006-2010). (CCR2005, No. 8)
    The first phase of Hainan LNG receiving station project has
a capacity of 2.0 million t/a and will be completed in 2009. The
capacity will be expanded to 3.0 million t/a in 2015. (CCR2005,
No. 13)
    The deputy director of the National Development and Reform
Commission Energy Bureau says that “besides the LNG projects
being constructed in Guangdong and Fujian, China will launch
more LNG projects in eastern coastal areas with advanced economy
according to the domestic demand and the international LNG
market and make the planned and moderate import of overseas
natural gas resources to bridge the supply shortage in China.”


Plans made by
CNPC


The appeal made by CNPC for natural gas price rise has always
been clear and simple. Everybody knows, however, that CNPC is
the largest advocator for natural gas price rise. Starting from
2000, CNPC has already made persistent efforts for more than 5
years.
   The deputy general manager of PetroChina Natural Gas Pipeline
Company says that “we hope that the government can make a
rational readjustment to the natural gas pricing mechanism to
make the price reflect the value. The pricing mechanism should
enable all links including natural gas production,
transportation, sales and utilization to get reasonable
benefits.”
    In his opinion, the natural gas pricing system in China
should be linked to the international market as soon as possible.
As a new-round buyers' market will soon appear, China should
quickly establish a flexible and effective natural gas pricing
mechanism that is favorable to the conservation of resources and
reflects the situation of market supply/demand and the shortage
degree of resources.
    The latest data show that the total output of natural gas
in China was 40.79 billion m3 in 2004, an increase of 19.5%. The
output proportion was 58.4% for CNPC, 14.4% for Sinopec and 10%
for CNOOC. CNPC holds an absolute leading position in the natural
gas sector.
   The west-east gas transmission project is a huge growth point
for the future development of CNPC. The project has a total
investment of RMB48.41 billion and started construction on July
4, 2002. CNPC holds 50% equity in the project whereas Sinopec
only holds 5% equity. According to reports published by Xinhua
News Agency, the west-east gas transmission project already
started commercial operation on Dec. 30, 2004. The gas supply
amount is expected to reach 12.0 billion m3 in 2005 and CNPC can
start to reap profits.
    An oil expert from a research institute of the state says
that “owing to the achievements made by CNPC in oil transmission
pipeline projects, projects of onshore gas transmission
pipelines from Russia and Mid-Asia to China will very likely fall
into the hands of CNPC.”




Difficulties met by Sinopec


Although the 3 oil giants all hope for natural gas price rise,
Sinopec is the most active player.
     The deputy director of Sinopec Oilfield Prospecting and
Development Division says that “on the one hand the low natural
gas price has helped to form a huge demand market. On the other
hand, however, it is because of the low price that the initiative
of enterprises in natural gas production can not be mobilized
and the gas supply has become inadequate.”
    Take the Daniudi Gas Field in Erdos for instance, natural
gas resources in China are not rich compared with foreign
countries. 220 wells are drilled in the Daniudi Gas Field and
the output of natural gas in one well is 22 000 m