Date: 02-27-2001

HONOLULU -- China's reported decision to prevent a state-run oil company from supplying natural gas to Shanghai over the next two years reflects the government's continued problems in developing a costly pipeline from Western China, said an East-West Center expert on China's energy industry.

"Ever since this pipeline proposal came up in 1999, there has been a lot of doubt over costs and the size of the market," said Kang Wu, who specializes in the Asian oil and gas industry. "Although the natural gas market in China is growing, it's still not enough to justify this costly project in the short term."

According to news reports, the government recently decided that it would not allow China National Offshore Oil Corp., the country's biggest offshore oil company, to expand its natural gas supply to Shanghai even though it's much closer to the city. Instead, Shanghai will draw new gas supplies from a $14.5 billion, 2,600-mile pipeline being promoted by China National Petroleum Corp., a rival state-owned company.

China National Offshore Oil Corp. has denied that the government banned it from supplying gas to Shanghai. However, it is widely known that its expansion plan may conflict with the cross-country pipeline project. The government has committed to developing the impoverished and remote Western China, which lags far behind the eastern region.

Wu said the pipeline project, which is open to foreign investment, has not raised much enthusiasm from private investors. It will be tough for the government to meet the 2004 target date for the pipeline and it may have to offer more incentives to investors, he added. "It's not a question of supply but rather developing the market for clean fuels. You see a conflict between the government's plans and commercial efficiency. The government is pushing too fast, too soon. For a limited gas market in the lower Yangtze region, which is young and growing, it is simply not economical to build the pipeline within two to three years."

China National Offshore Oil Corp., on the other hand, has attracted attention from overseas investors with its recent initial public offering that raised about $1.3 billion. The recent government decision to stop it from supplying Shanghai, if confirmed, may generate some bad news for the company. But it still holds much potential in other areas off China, Wu said. "The government says it wants to promote competition but has often done things differently," Wu said. "This is another reason to have more genuine reforms in China rather than simply reorganizing state enterprises."

Kang Wu can be reached at 808-944-7521 or wuk@eastwestcenter.org
This is an East-West Wire, copyright East-West Center