Western oil firms' China breakthrough

THE signing today of a deal to build a $20bn (£13.1bn) pipeline across China marks a major breakthrough in Western oil companies' attempts to access one of the largest energy markets in the world.

For Shell, Exxon and other partners in the operation, the signing ends years of wrangling and the beginning of one of the biggest civil engineering projects in the world.

The pipeline, which will bring oil from the harsh western regions of China to the industrialised area around Shanghai in the east, is being developed by the State-owned PetroChina group, which has a 55% holding, while Royal Dutch/Shell, Exxon Mobil and OAO Gazprom of Russia have 15% each.

Foreign oil companies have been poking around China for decades, but found it a frustrating experience of dry wells and marshy bureaucracy. Now, with the country a full member of the World Trade Organisation, and its economy desperately in need of fuel to drive development, the real opportunities have opened up.

Ten years ago, China was a minor exporter of oil, but its massive growth in recent years means it now sucks in 1.4m barrels a day, and this is expected to double by 2010, according to Asian oil experts. The prospect of feeding that market and supplying the necessary infrastructure has attracted the world's oil majors to China, where they have teamed up with the local State enterprises.

Shell, Exxon and British Petroleum have invested about $3bn buying stakes in China's three major oil companies. They believed the stakes would pay off in partnerships in major projects, where their expertise and the locals' access to the market would fit perfectly.

The strategy has worked. In addition to the West-East Pipeline, foreigners now have big interests in refineries, chemical works and, increasingly, retail petrol stations, which are about to enjoy exploding demand as a rapidly more affluent China takes to the roads by the millions.

While many of China's national oilfields are drying up, it has massive natural gas reserves, onshore and offshore, and will want to develop them as sources of cheap and clean power.

Other ambitious pipelines are planned. While BP has pulled out of the West-East project, apparently uncertain about its economic viability, the company is in talks with another group which plans to build a line that will carry natural gas from Russian fields to markets in China and South Korea.

BP's chief executive in China, Gary Dirks, said this week that he was sure the $11bn project was feasible. 'I'm confident that gas must come from Russia, and I'm confident that an economic project will be developed to bring that gas to China,' he told reporters in Beijing.

Talks are continuing. While they have already suffered delays as the parties, which include Korea Gas and the Russia Petroleum Company, have wrangled, the deal is expected to be signed before the end of the year.

Although environmentalists have raised objections about the West-East pipeline, Shell argues that it has taken steps to ensure that the impact will be minimal. It has signed an agreement with the United Nations Development Programme to conduct a social impact assessment for the West-East Pipeline Project. It will set up a consultation programme along the pipeline route to assess the issues, impacts and concerns for the people most affected.