Olympian Hurdles for China's Pipelines


Watching the U.S. and China do business is a little like watching great-grandparents attempting to tango. If you resist the temptation to look away from the arthritic footwork, you'll notice that decades of cautious understanding and ritualized method are in play.

And so it was with the Fourth U.S.-China Oil & Gas Industry Forum in Houston on July 19. Senior government officials with close ties to industry and trade on both sides of the divide exchanged compliments, ducked the tougher questions, and generally did business. But through it all, not a single foot was trod on, at least not in view of the public.

HIGH PRIORITY. China sent its strongest signals yet that it's ready to reel in some of the vast capital in the U.S. to jump-start the buildup of its energy infrastructure. The country, say senior government officials, is determined to complete work on at least one of two new major gas pipelines to supply Beijing and Shanghai in time for the 2008 Olympics, which it will host.

Zhang Yuqing, director of basic industries for China's State Development Planning Commission (SDPC), told the forum that China is keen to avoid any obstacles that might prevent at least one of the pipelines from being finished in time. Surges in demand for gas and electricity are expected. But while China is confronted with huge supply-demand headaches, the forum ended with little evidence that the Chinese government has fully resolved its internal struggle over how to deploy capitalist investment and still maintain a Communist facade.

The West-East Pipeline, a project that will feed Shanghai with 12 billion cubic meters of gas each year from the Tarim Basin in far-away Xinjiang, is close to development after a Joint Venture Framework Agreement (JVFA) was signed earlier in July, 2002.

PLAN B. But the sheer size of the pipeline, which would stretch 2,486 miles (4,000 kilometers) along China's geographically hostile northern territories, means it will probably not be fully completed in time for the high-profile sports event in 2008. "We're in a hurry to get this [West-East] pipeline built as soon as possible," says Zhang, but acknowledging its immense size, he adds: "Therefore, the second priority would be [the] Shanxi-Beijing [pipeline]."

This back-up option is a more manageable 574 miles (923 km) long. It will carry 6 billion to 8 billion cubic meters of gas to Beijing from the Shanxi region's Erdos Basin, which has a generous 4.2 trillion cubic meters of estimated gas reserves. But this project will need to negotiate China's complicated partnership tender process quickly if it's to develop as quickly as the government hopes.

Forum attendees agree that the laborious tender process will present a huge challenge. The milestone JVFA for the West-East project was signed after two years of intense talks, involving regular consultations with the highest Chinese authorities.

"MUCH TO DISCUSS." According to Xu Dingming, SDPC's counsel for industrial development, Beijing has been rigorous in applying the letter of Chinese law during the West-East talks -- and will be equally stringent in all upcoming venture negotiations. But the West-East JVFA breakthrough isn't a final deal, which remains some way off. As a 15% partner, Shell International Gas Ltd., a division of Royal Dutch Shell, admitted in its July 4 release on the JVFA that it's "a significant milestone toward the signing of a Joint Venture Contract. However, there is still much to discuss and agree."

The foreign partners in the West-East project -- Russia's Gazprom (15%), ExxonMobil (15%) in the U.S., and Royal Dutch Shell -- are now at the front of a long line of international investors keen to bet on Chinese energy demand's likely exponential growth.

According to Chinese government forecasts, the annual demand for gas should surge in the Shanghai-Beijing region from 81 billion cubic meters in 2005 to 195 billion cubic meters in 2010, boosted by preparations for the Olympics in the region. By 2020, the government expects that the region's demand will have hit 402 billion cubic meters per year.

LABRINTHINE LAWS. But meeting China's spiraling demand will be expensive for foreign investors. On top of funding years of negotiations that have uncertain outcomes, armies of lawyers will be needed to plot a way through China's labyrinthine investment laws. Major investment will also be needed to bring on board staff with the ability to do business in China -- indeed, most of the major companies sponsoring the U.S.-China forum had Chinese and Chinese-American staff out in full force in Houston.

And they'll be needed if the two countries are to make headway on energy projects before the end of the decade. China has promised some deregulation of gas prices and a "pooling" of localized power generation (so that the energy produced can be supplied through improved grids to electricity-hungry regions further afield), developments that could mirror Western market models.

Such reforms would dictate how much potential return investors could expect in China and could make or break new projects. But when asked what these reforms might look like or when they might come into effect, Chinese government officials proved adept at the forum in providing nonanswers.

Beijing regards such major bargaining chips as unsuitable for public consumption while closed-door talks continue. As Zhao Houxue, an executive of oil company Sinopec chairing the forum's final panel, told his audience at the close: "Our friends in America have asked some very interesting questions. Our representatives from China have given some very wise answers." By David Ernsberger, editorial manager of Platts (like BusinessWeek Online, a unit of The McGraw-Hill Companies) in Houston


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