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BP Invited to Safeguard Energy Supply

China is seeking multi-national oil companies like BP, Europe's largest, to join its scheme to safeguard a long-term stable energy supply.

A broader range of potential cooperation is under discussion, including having Chinese companies participate in the development of BP's reserves worldwide, or even jointly explore reserves globally, according to BP's executives.

The strategy was put forward during Premier Wen Jiabao's visit to BP's headquarter in London in May.

It is Beijing's latest move to construct a comprehensive system to defend its energy security. The country, now the world's second largest oil consumer, is investing billions of US dollars to build up strategic oil reserves, diversifying oil imports, promoting natural gas consumption, and buying into fields in foreign countries.

Byron Grote, BP group's managing director and chief financial officer, flew to Beijing earlier this week as a follow-up visit.

Grote held a series of discussions with National Development and Reform Commission, and PetroChina and Sinopec China's largest two oil companies, to pursue the ideas Premier Wen and BP's CEO Lord John Browne have been discussing.

"We are continuing to look at a range of possible ideas," said Grote in an interview with China Daily. "It is still at a very early stage, but we believe that there is a role to be played by BP in providing energy ... in wide respect of energy security for China."

Grote said energy security requires a combination of three categories: exploration and production at home; acquisition of resources outside the country; trading on the global market.

In this regard, BP could be helpful as it is the world's largest trader of oil and oil products, and operates oil and gas fields in 100 countries with businesses in Europe, North and South America, Asia and Africa.

"We do have expertise in second and third (category) that could provide a source of mutual benefits for China and BP," said Grote.

Among many options, BP may allow Chinese companies to join the development of oil and gas resources where BP has a share; Meanwhile, BP will help the producing countries access the Chinese market.

BP and Chinese companies may also jointly explore resources worldwide, according to Grote.

"Potentially, (there will be) tri-part deals between producing nations, international companies like us, and big consuming nations like China," said Grote.

"This (to have Chinese companies join BP's projects) is an area that we will have to look at and we are looking at," said Grote.

Gary Dirks, president and CEO of BP China, maintained that the cooperation should be of mutual benefit to all parties, inside and outside China.

The executives said BP has already been involved in tri-party cooperation through two liquefied natural gas (LNG) projects in south China's Guangdong Province and east China's Fujian Province.

China National Offshore Oil Corp, the nation's largest offshore oil producer, imports 3.7 million tons of LNG annually from Australia's Northwest Shelf project and 2.6 million tons annually from Indonesia's Tangguh field to supply two terminals in Guangdong and Fujian.

BP has interests in Northwest Shelf, and a controlling stake in Tangguh. It also holds a 30 per cent share in the Guangdong LNG terminal.

In exchange, CNOOC is allowed to buy stakes in Northwest Shelf and Tangguh projects.

Grote and Dirks said the cooperation is benefiting all participating parties: Indonesia and Australia have created a market that allow the development of the gas fields; China gets LNG and CNOOC and BP bring profits to shareholders.

The executives said such co-operation could be copied.

"We are looking for more occasions where that might be possible," Grote said.

Gas project

A visible extension of such cooperation might be the US$16 billion Russia-China-Korea gas project.

The project aims to build a 4,900 kilometer cross-border pipeline to carry 30 billion cubic meters of natural gas annually from Kovykta gas filed in East Siberia to China's northeastern provinces and to South Korea for 30 years.

Kovykta's operator Russia Petroleum in which BP's venture TNK-BP holds a controlling stake signed a preliminary deal last year with China National Petroleum Corp (CNPC) and South Korea's Kogas to supply Siberia gas from 2008.

The companies are negotiating on commercial terms to finalize the deal.

BP's executives said they are optimistic to push the project forward, even though earlier reports said the project took a knock when Gazprom the monopoly exporter of Russian gas expressed strong wishes to join the project.

Grote denied that BP was opposed to have Gazporm in.

"Gazprom by necessity has to have a role in the project and we are working with them to agree with what that role would be," said Grote.

"Good discussion is going on. There has been considerable progress in recent weeks."

Grote said CNPC, Korea, TNK-BP and Gazprom will hold a series of negotiations in July on the pricing of the gas.

He did not rule out the possibility that CNPC might get a stake in the development of the Kovykta field. The gas field has reserves of more than two trillion cubic meters of gas almost equal to the world's entire annual gas output.

"Whether CNPC can get a stake in the fields has to be addressed in the overall discussion," said Grote.

Both Dirks and Grote expressed their optimism on the Chinese gas market.

The Chinese Government is promoting gas consumption to reduce over-reliance on oil imports and replace coal for power generation to reduce pollution.

The government plans to more than double its gas consumption in the total energy consumption mix to 6 per cent by 2010 from current less than 3 per cent.

Beijing is building a 4,000-kilometre gas pipeline from Xinjiang Uygur Autonomous Region on the west front to Shanghai in the east. It is also considering building LNG terminals along prospective coastal areas.

Aside from the pipeline gas, Grote said BP is looking forward to participating in further LNG development schemes.

Grote said there was the prospect of additional volumes from Tangguh to the Chinese market. It is also looking forward to provide LNG from its reserves in other parts of the world.

Retail market

BP's executives also said the company is eager to expand the retail networks for oil products in China to cash in on one of the world's fastest growing market.

Earlier in May, BP sealed contracts to build 500 gas stations in Zhejiang with Sinopec and another 500 stations in Guangdong Provinces with PetroChina.

The joint ventures came just ahead of the deadline in December for China to open its tightly controlled and lucrative retail market for oil products to foreign companies as it committed to the World Trade Organization.

Dirks said BP is eyeing all coastal areas and Chongqing in Southwest China for expansion.

But BP would join with Sinopec and PetroChina for expansion rather than work on its own.

"That will be our intention at the time," said Grote. "It is often times unwise to go by yourself when you have no experience."

The executives also described the co-operation as a "win-win" deal: PetroChina and Sinopec obtain management and marketing savvy, while BP gains experience in marketing in China.

"Our brand beside a Chinese brand creates a powerful combination that is stronger than each one of those independently," said Grote.

BP has invested more than US$4 billion in China since first establishing a presence 30 years ago, operating business in oil and gas production, petrochemicals, and marketing of oil products.

BP has said it will invest a further US$3 billion in China over the next five years.

(China Daily July 1, 2004)

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