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Same-Day Analysis

China to Accelerate Major Pipeline Projects as Part of Economic Stimulus Plan

Published: 10 March 2009
Su Shifeng, chief consultant of China Petroleum Pipeline Bureau—a unit of China National Petroleum Corp.(CNPC)— has announced that construction of strategically important oil and gas pipelines will be accelerated as part of China's recent stimulus package and its emphasis on infrastructure spending.

IHS Global Insight Perspective



China hopes investment in major transnational and international pipeline projects will help boost manufacturing demand and create jobs to combat the slowing economy, while promising longer term benefits of boosting energy security through supply diversification and consolidating China's political ties with key regional oil and gas producers.


The bullish investments required by CNPC to realise these pipeline projects are likely to eat into its margins, particularly since the government is already forcing the company to increase expenditure on major downstream projects as part of its refining and petrochemical stimulus plan.


The pipeline projects will help China to meet rising gas demand, due to hit around 210-250 bcm by 2020, while reducing reliance on oil imports through the vulnerable Strait of Malacca. Given Russia's rather dubious record as a gas supplier to Europe and the unstable political and social environment in Myanmar, there are some concerns over the ability of these countries to provide reliable oil and gas supplies over the long term.

Projects in the Pipeline

Su Shifeng, chief consultant of China Petroleum Pipeline Bureau (a unit of China National Petroleum Corp. [CNPC]) has announced that construction of strategically important oil and gas pipelines will be accelerated as part of China's recent stimulus package, which emphasises spending on infrastructure. Planning and construction of pipelines from Central Asia, Russia, and Myanmar will be among those projects sped up in order to boost demand for materials and labour.

Second West-East Gas Pipeline

China is pushing forward construction of the 30-bcm/y second West-East Gas Pipeline (due to be completed by 2011) as part of its economic stimulus package. In November 2008, China's government approved plans to construct the 2,472-km eastern section of the pipeline as part of its fiscal stimulus package (see China: 9 February 2009: China Begins Building Eastern Segment of Second Cross-Country Gas Pipeline). The eastern section will traverse 15 regions and will contribute heavily to CNPC's plans to almost double China's gas grid by 2015 through adding 21,000km of pipelines. The project will also have an immediate impact on stimulating demand for materials, given that construction of both the western and eastern sections of the pipeline is currently underway, with the western section due to be completed this year.

Third West-East Gas Pipeline

Today, CNPC also announced that it will invest more than 100 billion yuan (US$14.6 billion) in construction of a third West-East gas pipeline as part of its infrastructure stimulus plan. Dispelling previous uncertainty over the proposed route, Shifeng said that the third pipeline will start in China's north-west Xinjiang province and run parallel with the second west-east pipeline as far as Jiangxi in eastern China. From there it would diverge, probably to end up in Shandong Province, although this has yet to be decided. However, how the 20-30-bcm/y third West-East gas pipeline will be supplied with gas remains uncertain. Turkmenistan pledged last year to supply 40 bcm/y of gas for the Central Asia Pipeline, which will run 7,000 kilometres across Central Asia to the Xinjiang border. This was a 10-bcm increase on previous proposals, reflecting Turkmenistan's willingness to diversify gas exports away from Russia and tap new markets, particularly since China agreed to pay a relatively high price of US$195 per 1000 cm. However, the 40 bcm/y of gas is insufficient to meet demand for both the second and third West-East Pipelines, which together will require 50-60 bcm/y of gas. In 2008 gas output from Xinjiang Province was 24 bcm/y and is due to rise further in the coming years as output from fields in the Junggar Basin and from other areas is ramped up. The government could connect some fields to the third West-East gas pipeline helping to augment supplies from Turkmenistan, although this would break a previous policy of using output from the province as a back-up reserve in case of high demand or supply shutdowns.

ESPO Oil Pipeline Spur

China is also pushing forward plans to construct a spur from the East Siberia Pacific Ocean (ESPO) oil pipeline, which feeds into its broader infrastructure spending plan. The oil-for-loans agreement between CNPC and Russian oil companies Rosneft and Transneft, (which was prompted by the sudden financial difficulties facing Russian producers following the fall in crude prices) paved the way for the drawing up of plans for construction of a 67-km pipeline spur from Skovorodino in Russia to the Chinese border, which is due to commence construction in April 2009 and be completed by 2010. The project is expected to cost around 1.9 billion yuan with crude supplies starting in 2011. In addition, CNPC is soon expected to begin construction of the 965-km stretch of the pipeline inside China, which will run from Mohe City in Heilongjiang Province to Daqing in north-east China.

Myanmar Oil and Gas Pipelines

Su Shifeng also announced that preliminary work on a cross-border gas pipeline, due to run from Myanmar's western port of Sittwe to Kunming City in Yunnan Province, will begin in the fourth quarter of this year. The gas pipeline will be run alongside a proposed crude oil pipeline and CNPC previously said it would spend a total of US$2.54 billion to complete the projects. CNPC and the Myanmar Oil & Gas Enterprise have had to delay the date for the launch of construction due to difficulties in sourcing crude for the pipeline. Indeed, the government's insistence that CNPC develop both the projects simultaneously has also pushed back the gas pipeline project, which could be sourced more easily from Myanmar's offshore gas fields.

Outlook and Implications

Acceleration of the pipeline projects promises to bring long-term benefits to China in enhancing energy supply security. Through the ESPO spur, China will receive 15 million t/y of oil over 20 years, much of which could flow into a recently constructed 12 million-t/y crude oil storage facility recently completed by CNPC in Daqing, thereby protecting against future supply shocks and helping to offset any declines in production from one of China's oldest fields at Daqing, where output levels are supported by Enhanced Oil Recovery (EOR) techniques. Indeed, the Myanmar oil pipeline, the ESPO spur, and the Kazakhstan-China pipeline will together help China to reduce dependence on oil imports coming through the Strait of Malacca that are vulnerable to disruption due to congestion, collisions, pirate or terrorist attacks in the Strait, or even blockades by hostile foreign powers. However, given Russia's rather unreliable record as a gas supplier to Europe and given the unstable economic and political environment in Myanmar, some concerns remain over the long-term security of oil and gas supplies through these routes.

Nevertheless, the increase in gas supplies from the second and third West-East gas pipeline and the Myanmar pipeline will be crucial in helping China meet rising demand which is due to hit 210-250 bcm by 2020, according to some estimates. Increasing gas supplies will help China diversify its energy mix thereby easing dependence on coal which is highly polluting and damages the health of the population. Future gas supplies will also ease pressure on coal transportation infrastructure, which continues to struggle to work effectively during peak demand periods. Pipeline projects are also a major way for China to build political leverage with neighbouring states. Myanmar, whose biggest source of foreign exchange comes from exporting gas, is a case in point and China's future importance as a major consumer of gas from the country coupled with the benefits the ruling junta will receive from pipeline transit fees will consolidate China's position as Myanmar's most important ally.

While these projects promise to bring strategic political benefits to China while improving its long-term energy security, they could create some short-term discomfort for CNPC. The massive investments CNPC is ploughing into these projects are likely to eat into its margins, particularly when considered alongside the bullish investments the company is expected to maintain as part of the government's plan to boost construction of new refining and petrochemical projects to meet the government's 8.8-million b/d target by 2011.
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