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Oil giants pull out of East China Sea
By Xie Ye (China Daily)
Updated: 2004-09-30 08:52
Royal Dutch/Shell and the Unocal Corporation have withdrawn from one of the
largest offshore gas exploitation projects in China.
The companies pulled out of joint exploration, development, and marketing of
natural gas resources in the Xihu Trough of the East China Sea citing
"commercial reasons," Shell and Unocal said yesterday.
The pull-out by their overseas partners leaves Sinopec and the China National
Offshore Oil Corp (CNOOC) - the second and third largest domestic oil firms -
the only players in the project.
Analysts said the move of the overseas partners casts doubts on the potential
of the Xihu Trough, claimed to be one of China's top gas discoveries of recent
decades.
It was the largest Sino-foreign gas exploration project so far.
In early August 2003, Shell, Unocal, CNOOC and Sinopec signed five contracts
to explore three blocks and develop two in the Xihu Trough with an initial
investment of US$85 million. The blocks, 500 kilometres southeast of Shanghai,
cover 22,000 square kilometres.
The centrepiece of the project includes the development of the Chunxiao
fields which supply gas to booming Shanghai and Zhejiang Province.
CNOOC and Sinopec each hold a 30 per cent share in the project, while Shell
and Unocal each have 20 per cent. The terms of the agreements allow partners to
make a final investment decision after a 12-month period of appraisal and
analysis.
Barry Lane, spokesman for the United States based Unocal, said in a telephone
interview: "After the first year of analysis, we found the resources do not meet
our commercial requirements."
In a joint press release, CNOOC and Sinopec simply announced that Shell and
Unocal have decided not to continue participating in the next phase, "since both
sides have failed to agree on the existing development plan."
The Xihu Trough project is seen as an important move for China to increase
gas consumption in coastal areas, in an attempt to diversify its energy mix and
improve the environment.
Earlier this year the project attracted international attention after Japan
protested that the development of Xihu Trough extends beyond the "median line"
between the two countries. China refuted the claim, and rejected the validity of
the line itself, arguing that the natural demarcation should be drawn further
east.
Unocal's Lane yesterday dismissed suggestions that the company's decision had
anything to do with political disputes.
Despite the pull-out of foreign companies, CNOOC said it remains optimistic.
"We are confident about the project's future. The change of partners has
little impact on the ongoing project," Fu Chengyu, chairman and CEO of CNOOC
Limited said.
Zhou Shouwei, president of CNOOC, said: "Significant progress has been made
to optimize the Overall Development Programme (ODP) of the project.
"Meanwhile, gas marketing is progressing well. We... expect to complete the
project on time."
CNOOC said the Chunxiao field, the first to be completed in the Xihu Trough,
is set to come on stream in mid-2005 as scheduled.
Chunxiao is expected to produce 2.5 billion cubic metres of natural gas in
the immediate two years after production begins.
Analysts yesterday said that the withdrawal of the overseas firms may cause
difficulties for the project, although they agree CNOOC has sufficient
technology and experience to carry the project through.
"CNOOC now has to raise additional funds to finance the project," said Liu
Gu, an oil and gas analyst with the Guotai Gun'an Securities Hong Kong Ltd.
"In addition, Shell's excellent experience and technology in deep-water
exploration may also have increased the possibilities of success, if they were
in."
The Xihu Trough project is the second large project Shell has scrapped this
year in China. Just two months ago, Shell, along with ExxonMobil and Russia's
Gazprom, pulled out of the west-east natural gas transportation project after
failing to reach commercial terms with Chinese companies.
Liu said it comes as no surprise that Shell is adjusting its policies in
China as it seeks to calibrate its global strategy following a management
reshuffle earlier this year.
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