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CHINA'S WEST-EAST
PIPELINE HIGHLIGHTS ENERGY PROBLEMS
Natural gas began to flow through the mammoth 4,000-km
West-East pipeline at the beginning of the year, but
experts told RFA in a series of recent interviews that
state-owned operator PetroChina is still struggling to
deal with the project's crippling costs.
The first commercial deliveries began to flow along
the U.S.$24 billion pipeline on Jan. 1, but
authorities marked the event with little fanfare amid
growing nationwide energy shortages. But very few
companies have signed up to be supplied, partly
because natural gas cannot be stored, and users must
commit to a "take-or-pay" agreement, regardless of
future energy needs.
"The economic, commercial viability of this project
has always been put in question," says visiting
scholar Edward Chow of the Carnegie Endowment for
International Peace in Washington.
"What has happened so far proves that governments,
particularly large, capable governments like China's,
have the capacity to construct mega-projects, which
they have done here," Chow told RFA special
correspondent Michael Lelyveld.
"But whether it has an economic utility and is
commercially viable or not is highly questionable," he
added.
Much of the motivation for the project—the second
biggest after the Three Gorges Dam—was to meet the
demands of Shanghai residents for cleaner energy to
improve air quality and reduce the use of
high-polluting coal. The government also promoted the
pipeline for political reasons, as part of its "Go
West" campaign to develop the poorer regions and
provinces in China's hinterland.
So far, the eastern half of the line is delivering gas
from the Chanqing oilfield in China's Ordos Basin to
the Shanghai municipal gas network in the district of
Qingpu as a temporary step. Work is continuing on the
western part of the line to reach the distant gas
fields of Xinjiang, which will eventually supply
Shanghai.
Officials say that gas is now reaching residential
users in Shanghai, as well as major enterprises like
the Shanghai Automotive Industry Corporation and
Baosteel.
However, there has been no word about 46 letters of
intent that PetroChina signed in 2001 with big
potential gas buyers that were supposed to become
binding contracts to underwrite the line. Without the
"take-or-pay" contracts, PetroChina has no guarantee
that its investment will produce gas sales. Many
buyers, like Shanghai's power plants, have held back
because gas prices are too high.
"The problem is, really it comes down to a lot of
regulatory issues within China," Sam Dale, Singapore
bureau chief for Petroleum Intelligence Weekly, told
RFA. "There are still disputes from the power
generation companies as to how much they are wanting
to pay for the gas that they can burn to turn into
power."
While the government allows different price bands for
peak and off-peak electricity, it still does not do so
for gas. Recent hints that the State Economic and
Reform Commission may freeze utility charges for the
next year to combat inflation give power producers
even less incentive to produce more, still less invest
in enormously capital-intensive gas-fired power
generating units.
"The Shanghai pipeline has come onstream just as you
have a much wider crisis across the whole energy
sector," said Philip Andrews-Speed, China energy
expert at the University of Dundee. "The lack of
coherent energy policy and a long-term strategy of
knowing where you're going has really been the
underlying cause of where we are at the moment."
He said policymakers in Beijing had either ignored
warnings for years that they needed to create a
coordinated energy policy, or simply failed to make up
their minds. One effect of this vacillation is that
power plants are not being built fast enough because
Chinese investors have no idea whether investments
will pay.
"Until something is in place so that the players know
what the rules are and know where they're going and
within that framework there are incentives, until that
happens, I think the crisis is only going to get worse,"
Andrews-Speed said.
Carnegie's Edward Chow agrees. "It will be very
interesting to watch in the coming months whether the
new political leadership that's only been in place for
a year will similarly see this as an opportunity to
finally implement some structural reform," he told RFA.
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