The Wall Street Journal: Oil Companies Quit China Pipeline Project: “Shell… the lead negotiator with PetroChina” (ShellNews.net)

By XU YIHE

DOW JONES NEWSWIRES

August 4, 2004; Page A11

SINGAPORE -- A consortium comprising Royal Dutch/Shell Group, Exxon Mobil Corp. and Gazprom OAO decided to pull out of PetroChina Co.'s $5.25 billion (€4.36 billion) West-East natural-gas project in China.

A Shell official said the consortium decided to pull out of the pipeline project because it was unable to find "common ground" with PetroChina. Shell is the lead negotiator with PetroChina. PetroChina couldn't be reached for comment.

According to an initial agreement with PetroChina, the three companies in the consortium each have a 15% stake in the project, with PetroChina holding 50% and Sinopec Corp. holding 5%. The consortium, however, hasn't provided any funding for the project.

The negotiations have been deadlocked since early this year on a number of issues, including the percentage of the rate of return on the investment and downstream market development.

When announced two years ago, the project -- a 2,500-mile pipeline stretching from China's far west to its eastern coast -- seemed to mark the close of an era in which Beijing viewed its vast gas and oil fields as the crown jewels of its socialist economy, off limits to foreigners.

China-based industry officials said the consortium's withdrawal from the project will hurt the confidence of foreign companies in investing in China's energy sector in the long run, even though the move will have little impact on the operation of the pipeline.

The Shell official said, however, that its energy business in China will continue to grow, despite the failure to reach an accord on the pipeline project. "We expect that the total funding for the Shell share of projects in China during 2004 will amount to $1 billion, the highest ever in a single year," he said.

The West-East gas pipeline links gas reserves in the Ordos and Tarim basins in western China and markets in eastern China around Shanghai. PetroChina started commercial operation of the first section of the pipeline in January and completed construction of the second section yesterday.

PetroChina aims to increase the gas supply from the pipeline to eastern China to five billion cubic meters next year, far lower than the pipeline's designed capacity of 12 billion cubic meters a year, mostly to household and commercial users.

Write to Xu Yihe at yi-he.xu@dowjones.com