IHS Global Insight Perspective | |
Significance | The gas transmission project was one of the most technically challenging in China's history, due to the need to construct gas gathering and purification plants and build 800 kilometres of pipeline through steep mountains and valleys, which required construction of an elaborate tunnel system. |
Implications | The transmission project promises a major boost for Sinopec's strategy of expanding its upstream portfolio to reduce exposure to crude oil price increases. The company is particularly susceptible to such increases due to its reliance for revenue on refining and petrochemical production. |
Outlook | The Sichuan-East China link will provide a meaningful increase in gas supplies to Shanghai and to cities supplied by branch pipelines; rapidly increasing gas demand in China suggests that the project is unlikely to provide a long-term gas supply solution in eastern China, although favourable exploration campaigns by Sinopec in Sichuan province could pave the way for further supply increases going forward. |
Sinopec Kicks Off Sichuan Gas Link
Sinopec has started operating a major natural gas trunk-line project, due to run 1,700 kilometres from the Puguang field in the North-East Sichuan Basin in Sichuan province all the way to eastern China. Including secondary and spur pipelines, the project will have a total length of 2,251 kilometres. According to IHS Global Exploration & Production Service (GEPS), the gas transmission project has claimed to be the most challenging project in the history of pipeline construction in China.
On the upstream side, the US$9.2-billion project includes exploration and production of gas reserves at the Puguang gas field in Sichuan province. Discovered in 2003, Puguang is one of China's largest gas fields and development promises a major boost for Sinopec's strategy of expanding its upstream portfolio to reduce exposure to crude oil price increases, which the company is susceptible to due to its reliance for revenue on refining and petrochemical production. However, with high concentrations of the toxic and flammable gas hydrogen sulphide, as well as carbon dioxide, developing the Puguang field has proved a rather costly and potentially hazardous undertaking. Sinopec has invested in a gas gathering plant supplied by pipelines connecting various wells from the field and a gas purification plant, which includes gas sulphurisation, dehydration, sulphur recovery, tail gas treatment, and acidic steam water stripping units to remove impurities from the gas prior to transmission. On the midstream side, constructing the pipeline was also technically challenging with around 800 kilometres travelling through steep mountains and valleys, requiring construction of 72 different tunnels. The whole pipeline also passes through eight different provinces including Sichuan, Chongqing, Hubei, Jiangxi, Anhui, Zhejiang, Jiangsu, and Shanghai, crosses the Yangtze River five times and consists of one main trunk-line, one secondary line, and three spur pipelines that will feed other cities near the pipeline route.
The pipeline is due to provide a major boost to supplies in eastern China and will build on increased gas supplies from the Zhongwei-Jingbian branch, now fed by the western section of the Second West East gas pipeline (see China: 26 January 2010: CNPC Launches Commercial Operations on Western Section of China's Second West-East Gas Pipeline). The pipeline will transmit 4 bcm of gas this year and 12 bcm/y at peak capacity, providing a welcome supply boost in the context of gas shortages in a number of cities in central and eastern China over the winter of 2009 and 2010. According to government agency the General Administration of Customs, China's natural gas demand has been rapidly increasing since the start of the millennium, by 16.2% per year on average between 2000 and 2008 and by 13.2% between 2008 and 2009. Boosting natural gas transmission capacity is a key means for China to improve gas supply security to residential and industrial consumers. However, China's limited gas storage facilities—which in 2009 accounted for less than 5% of annual demand—are also a major reason for vulnerability to supply shortages. While the Sichuan-East China link will provide a meaningful increase in supplies to Shanghai and to cities supplied by branch pipelines such as Nanjing, Chongqing, Jiangxi, Changzhou, and Suzhou, rapid increases in China's gas demand, which China National Petroleum Corp. (CNPC) now estimates could hit 300 bcm by 2020, suggest that the transmission link is unlikely to provide a long-term gas supply solution for eastern China. Nevertheless, promising exploration campaigns by Sinopec in Sichuan could pave the way for further supply increases going forward.
Outlook and Implications
The successful launch of the Sichuan-East China transmission project is more evidence of the promising potential for gas reserves in Sichuan province. At the end of 2009 a considerable 17 tcf of in-place gas reserves and up to 53 tcf of proven, probable, and possible reserves had already been discovered at the Puguang, Dawan, Maoba, Qingxi, Shuangmiao, and Laojun gas complexes, which will serve the pipeline for at least 20 years. Sinopec is now carrying out further drilling in the North-East Sichuan Basin and a number of wells have encountered good shows of hydrocarbons. The discoveries at Puguang have prompted significant interest in the Sichuan Basin from IOCs, which, due to their experience in developing sour gas reserves, may have a rare opportunity to team up with China's NOCs in the area. Indeed, Shell recently signed a production sharing contract (PSC) with CNPC for the 4,000-sq. km Jinqiu field following the two companies’ joint bid for Arrow Energy (see China: 23 March 2010: Shell, CNPC Agree to Joint Gas Venture in China).
Investing in China's gas sector has become more attractive given indications that the National Development and Reform Commission (NDRC) is willing to approve higher natural gas prices for new projects such as Puguang. Sinopec is charging 1.28 yuan/cm from gas from Puguang, amounting to 2.12 yuan/cm at the city gate in Shanghai (see China: 16 July 2009: Gas Prices Set for Massive Puguang Field in China's Sichuan Province). Increasing gas prices may partially be the result of Sinopec's need to cover the costs of gathering and purifying the gas and transmitting over a long distance, although the government also harbours broader ambitions to raise prices and margins in the sector to encourage increased investment by NOCs to support a much needed rapid increase in supplies.