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China's giants use pipes to grab market

October 21, 2009 - Chinese energy companies may be state-owned but they are encouraged to compete with each other. Sinopec and PetroChina are going head-to-head, but this might not be to the benefit of consumers though.

Sinopec, China's second largest gas provider, is pressing ahead with plans to expand its imported liquefied natural gas capacity in Shandong province, but its efforts have been called into question by the availability of pipeline gas from central Asia being delivered by rival PetroChina. (See a related map: China's pipelines, planned and actual.)

With government backing and firm supply deals, PetroChina, China's largest gas provider, is expanding its scope to supply pipeline natural gas to Shandong, which has traditionally been Sinopec's domain.

Fueled by various energy-intensive industries, Shandong generated more than yuan 3.1 trillion ($450 billion) of GDP in 2008, propelling it into second place among China's provinces in terms of GDP, and, from a global perspective, just below Norway.

China National Petroleum Corporation, parent company of public-listed PetroChina, signed on September 28, 2009 a cooperation deal with Shandong provincial government to set up a joint venture to build a natural gas pipeline network within the coastal province in eastern China.

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The JV, Shandong Natural Gas Pipeline Network Company, will undertake the planning, design and construction of the network.

It will include one trunk line and six branch lines with a total length of 1,067 km.

The 11 Bcm/year pipeline network is expected to be fully ready for use by late 2010 at a cost of about 9 billion yuan, CNPC said.

Once the pipeline network is operational, PetroChina's Shaanxi-Beijing gas pipeline and the second west-to-east gas pipeline will be linked up with Shandong province's pipeline network via PetroChina's Ji-Ning gas pipeline.

One of the six branch natural gas pipelines connecting the province's Tai'an city with the coastal Weihai city is already under construction.

Besides the pipeline grid, PetroChina has sent taskforces to carry out site studies and market research for a new LNG import terminal in Shandong, near Weihai.

Beijing has shifted out of panic mode, into a "more stable crisis management mode," suggests global think-tank Stratfor.

It is looking to expand resource acquisitions, while trying to diversify investments made with its massive foreign currency reserves.

As the terminal is subject to approval from the central government, PetroChina will list it as a project scheduled for construction during the next five-year planning period: 2011 to 2015.

The rationale for the new terminal is based on peak-shaving demand by local utilities when pipeline gas from PetroChina's two west-east gas pipelines falls short.

Central Asia's gas under question

The central Asia gas pipeline, which is to link Turkmenistan, Uzbekistan, Kazakhstan and China, at some point will pump gas to Shandong via above-mentioned pipelines.

It was due tol start operations in December, allowing Beijing eventually to purchase 40 Bcm/year of gas from Turkmenistan.

But China has since said Turkmenistan has downed tools.

PetroChina's second west-east gas pipeline, which will send gas from central Asia to China's financial hub of Shanghai in the east, and the country's top exporter, Guangdong province is also delayed.

Meanwhile, Sinopec has kicked off the building of a pipeline to export gas from northern China's Ordos basin to eastern China´s Shandong province as it plans to boost output from the Daniudi gas field.

The yuan 8 billion line will span 1045 km from Yulin in the northwestern Shaanxi province via Shanxi and Henan provinces before terminating in Jinan, the capital of Shandong province.

The line is scheduled for completion in October 2010, said a senior Sinopec official. initial flows of 1.8 Bcm/year will rise to 3 Bcm/year.

Sinopec plans to transport gas produced from its Daniudi gas field in the Ordos basin to Shandong province via the Yulin-Jinan gas pipeline.

Sinopec already operates a gas pipeline linking Daniudi with Yulin to transport 1 Bcm of gas into PetroChina's second Shaanxi-Beijing gas pipeline, between Yulin and Beijing.

But PetroChina has stopped allowing Sinopec's use of the second Shaanxi-Beijing gas pipeline, since it has increased its own gas output from the Ordos basin.

PetroChina wants to transport more of its own gas through that line to supply more downstream gas users.

For PetroChina, selling its own gas to endusers is much more profitable than receiving transportation fee from Sinopec.

Sinopec will have to transport gas produced from its Daniudi gas field through its own Yulin-Jinan pipeline, also known as Shaanxi-Shandong gas pipeline, said the senior Sinopec official. That line is still being built.

Sinopec has twice postponed the building of Yulin-Jinan route because of vague prospects for the Daniudi gas field.

Sinopec intended to build it in 2004, but dropped the plan after the central government persuaded it to build a much shorter line from Daniudi to Yulin, from where the gas is piped into PetroChina´s trunk line to Beijing.

The eastern section of Yulin-Jinan pipeline from Puyang in Henan to Jinan will be in operation this November, said the Sinopec official.

The official added that Sinopec will source gas from Sinopec's aging Zhongyuan oil and gas field to ease gas shortage in Shandong during the winter times prior to the readiness of Daniudi Gas until October 2010.

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