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Volume 6, issue #20 - Wednesday, October 24, 2001

West-east pipeline is not just a big infrastructure project

17-09-01 Insecurity and imperial vanity drove China's Ming Emperors to build its Great Wall. The 6,000 km of brick and stone bastions were built to deter a Mongol invasion. The Wall took two centuries to complete and ultimately failed in its objective. Insecurity remains to this day in Beijing as China struggles to bring its backward hinterland into the capitalist fold and work is soon to begin on a great infrastructure project.
Costing $ 18 bn (12.25 bn), it will put the stamp of Beijing's power over its most remote regions. It is a 4,200-km gas pipeline linking gas fields beneath the deserts of Xinjiang province to the city of Shanghai, and it will bring energy security to the wealthy east and development to the indigent west, the Chinese Government says.
It could also bring trouble. There is the possibility of financial loss, but there is also political risk. Discontented Muslim minorities, Uyghurs and Tajiks, deeply resent the dominance of the Han Chinese. This is not yet Osama bin Laden territory, but occasional riots in the old Silk Road city of Kashgar have rattled nerves in Beijing.

Due west of Kashgar is the forbidding Pamir mountain range and beyond is Afghanistan. A nuclear-powered China has no need of a Wall to keep out foreign armies. But no weaponry, wall or mountain can stop the infiltration of ideas.
Instead, Beijing's solution is lengths of 40-inch steel pipe. It doesn't quite capture the grandeur of the Great Wall, but the west-east pipeline is an extraordinary idea. The full cost of wells, pipeline and getting gas into homes, factories and power stations will reach $ 18 bn, far beyond the means of the Government's chosen promoter, PetroChina.
Foreign companies -- BP, Shell, ExxonMobil and Russia's Gazprom -- were invited to bid for a share in the pipeline. Each hopes that the Chinese can be persuaded to release choice morsels of an energy market that is growing in leaps and bounds.
Unexpectedly, one of the top three foreign bidders, BP, has pulled out. PetroChinawas quick to insist that the rival bidders, including Shell, which is now working with Gazprom and ExxonMobil, were still onside. However, BP's withdrawal may give other bidders the chance to make their excuses. China's west-east pipeline is a commercial, and a political, hot potato.

The energy industry had long been aware that there was oil and gas in the Tarim Basin, a vast desert in the Xinjiang Uyghur autonomous region. But how much and of what quality was unknown. According to Philip Andrew Spede, a Sinologist at Dundee University, there were few arguments about China's energy future.
Demand for energy was in the eastern coastal cities and China would import gas to convert dirty coal-fired power stations and replace poisonous coal gas for homes. Huge reserves discovered in Australia, Indonesia and Eastern Siberia would be sucked into China's ravenous cities.
BP lobbied for a pipeline linking its Siberian gas field near Lake Baikal with Beijing. Every big coastal city in China cobbled together a plan for a LNG-receiving terminal. "Up until two years ago, the idea of building a pipeline from Tarim was a joke," says Professor Spede.
Then in June 1999, President Jiang Zemin announced a plan to "develop the West". The economic reforms of the past decade have split Chinese society. An eastern urban elite profits from the rampant capitalism and consumerism, while the rural hinterland struggles in poverty. Signs of civil unrest among the Uyghur Muslim minority in Xinjiang are worrying. The new campaign will "help to develop China's economy, stabilise local society and contribute to China's unity", the President said.
By chance, the new policy coincided with a discovery in the Tarim basin -- the Kela-2 well found 250 bn cm of gas. Since then Tarim Oil, part of China National Petroleum Corporation, has made further gas discoveries.

Once a pipedream, the west-east pipeline has become the bulwark of a drive to bring China's great capitalist experiment to backward rural provinces. And the west-east line is competing with other great transcontinental schemes. Gazprom and Yukos, the Siberian oil company, want to pipe Russian gas to China across the Mongolian steppes. BP has a stake in Koytskoye, a gas field near Irkutsk.
West of Tarim, across the Tien Shan mountains, are the massive stranded gas fields of Kazakhstan and Turkmenistan. ExxonMobil has long dreamt of a line that would bring Turkmen gas to China, and the west-east project could be the first leg. Fergus Macleod, oil analyst for Deutsche Bank, compares the promoters of these great pipelines with the 19th-century railroad pioneers that connected the American West to the East.
"Those rail links evolved into important economic arteries in previously undeveloped regions," he says. "Can the new 'Energy Express' have the same impact?" Huge doubts remain about the commercial viability of the project. Privately the foreign oil companies worry about the price at which gas will be sold. PetroChina talks of a price of $ 4.35 per mm Btu, above the prevailing price of gas in the US. For Chinese consumers, such a price would be exorbitant and could never compete with cheap and dirty coal.

George Gilboy, head of Cambridge Energy Research in Beijing, reckons the west-east pipeline is not just a big infrastructure project, but also a watershed for China's economic planners. The country is in transition to a market economy and has yet to establish a pricing mechanism for strategic commodities such as gas. However, it has taken the first steps by creating private energy companies. "The key difference is that the foreign oil companies are no longer the only guys who want to make money," Mr Gilboy says.
PetroChina, he says, is a privatised company with a mission to make profits and autarchy is no longer the principal policy instrument in Beijing. "This project can be commercially viable, but the Government will need to do its homework," he says. Others have doubts. Professor Spede agrees that the pipeline will be built. However, he wonders whether foreigners will take part or whether the mandarins in Beijing will tell the country's banks to provide soft loans to PetroChina.

What could deter Shell and ExxonMobil and what may have caused BP to quit is the timetable and questions about demand. In the back of their minds is another pipeline project linking another gas field, Ordos, to Beijing. Unfortunately the city authorities failed to build a market for the gas in good time. When the Ordos wells began pumping gas into the line in 1997, few buyers were waiting to take it at the other end. The pipeline has only recently filled to capacity.
There is another question that might give investors pause for thought. Is this pipeline about the development of the west or its exploitation for the benefit of the east? Digging up natural resources has rarely led to benefits for local people, Professor Spede says. "If China wants to develop the west for the benefit of the west, they must set in place the mechanisms to distribute the wealth," he says.
No oneknows better than Shell, an old hand in Nigeria, and ExxonMobil, a big investor in Indonesia, that bad community relations can wreck a project. What assurances they are getting from Beijing is not clear, but what is certain is that they cannot afford not to show willing. As one China expert puts it: "If you are one of the big guys and someone invites you to dinner, you must attend. You don't have to eat your dinner, but you must go."

Source: Times Newspapers Ltd.


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copyright Alexander Wostmann