PetroChina Gas Pipeline Talks Collapse
PetroChina signalled its desire to end its business talks
for a gas pipeline leading from Russia in the west to
Shanghai with its western partners, Royal Dutch Shell
and ExxonMobil. Russia's gas monopoly, GazProm, was also
involved. The project, known as the West-East project,
failed because PetroChina said that it was unable to pass
higher gas prices on to its consumers in Shanghai and
its immediate environs.
The project had support from the former premier Zhu Rongji,
who wanted to switch China from relatively highly-polluting
Chinese coal to the cleaner gas. It was also seen as a
flagship project for western energy firms in China, where
they would be able to tap into China's huge and growing
consumer energy needs. While Standard Oil, Exxon's predecessor
had a significant presence in China before WWII, it had
virtually no presence after the founding of the Peoples'
Republic in 1949.
However, gas prices are still higher than coal, and the
business proposition did not fly. Significantly, the Chinese
government refused to subsidize gas prices to make the
deal work.
ExxonMobile was insistent on returns of 15%.
The original proposal were for PetroChina to own 50%
of the pipeline, with Exxon, Shell and GazProm each owning
15%. SinoPec, a Chinese refiner, would own 5%.
The negotiations were a case study in how business discussions
became more complicated, instead of simpler. The parties
each negotiated on their own behalf, instead of sharing
risks as a group. The result was that each party effectively
had a veto.
The construction of the pipeline had progressed ahead
of the business discussions, and the pipeline is already
largely completed and partially operational.
Energy prices and futures are now highly volatile because
of strong demand from China and concerns in the war against
terrorism. In recent days, energy futures prices, especially
oil, have hit new highs.
Chinese consumers will have to pay higher energy prices
than they are currently paying. When that happens, it
is likely that the Chinese companies who handle refining
and distribution will reap higher returns, while the western
energy firms will be left out.
Before you go, did you like this article?
If so, you can receive a free email newsletter version
each weekday. Sign up using the China Business Express
form on this page.
