Royal Dutch/Shell and the Unocal Corporation have withdrawn from one of the largest offshore gas exploitation projects in China.

The companies pulled out of the deal involving the joint exploration, development, and marketing of natural gas resources in the Xihu Trough of the East China Sea, citing commercial reasons, Shell and Unocal said on Wednesday.

The withdrawal of their overseas partners leaves Sinopec and the China National Offshore Oil Corp. (CNOOC) -- the country’s second and third largest oil firms -- the only players in the project.

Analysts said the move by the overseas partners casts doubt on the potential of the Xihu Trough, one of China’s top gas discoveries in recent decades. Earlier this year, Sinopec reported that it had overestimated its estimates of reserves in the area.

The project was the largest Sino-foreign gas exploration project to date.

In early August 2003, the four companies signed five contracts to explore three blocks and develop two in the Xihu Trough, with an initial investment of US$85 million. The blocks, 500 kilometers southeast of Shanghai, cover 22,000 square kilometers.

The centerpiece of the project is development of the Chunxiao field, which supplies gas to booming Shanghai and Zhejiang Province.

CNOOC and Sinopec each hold a 30 percent share in the project, while Shell and Unocal each have 20 percent. The terms of the agreements allowed the partners to make a final investment decision after a 12-month period of appraisal and analysis.

Barry Lane, spokesman for the United States-based Unocal, said in a telephone interview: “After the first year of analysis, we found the resources do not meet our commercial requirements.”

In a joint press release, CNOOC and Sinopec announced that Shell and Unocal have decided not to continue participating in the next phase, “since both sides have failed to agree on the existing development plan.”

The Xihu Trough project is seen as an important way for China to boost use of natural gas in coastal areas, as it seeks to diversify its energy mix and reduce pollution. The government plans to increase gas to 8 percent in the total energy consumption mix by 2010 from less than 3 percent at present.

Earlier this year the project attracted international attention after Japan protested that the development of Xihu Trough extends beyond the “demarcation line” between the two countries. China refuted the claim and rejected the validity of the line itself, arguing that the natural demarcation should be drawn further east.

Unocal’s spokesman on Wednesday dismissed suggestions that the company’s decision had anything to do with political disputes.

Despite the withdrawal of the foreign partners, CNOOC remains optimistic.

“We are confident about the project’s future. The change of partners has little impact on the ongoing project,” said CNOOC Chairman and CEO Fu Chengyu.

Company President Zhou Shouwei said that they expect to complete project on schedule.

CNOOC said the Chunxiao field, the first to be completed in the Xihu Trough, is set to come on stream in mid-2005.

Chunxiao is expected to produce 2.5 billion cubic meters of natural gas in the first two years after production begins.

Analysts said that the withdrawal of the overseas firms might cause difficulties, although they believe CNOOC has sufficient technology and experience to carry the project through.

“CNOOC now has to raise additional funds to finance the project,” said Liu Gu, an oil and gas analyst with Guotai Gun’an Securities Hong Kong. “In addition, Shell’s excellent experience and technology in deep-water exploration may also have increased the possibilities of success, if they were in.”

The Xihu Trough project is the second large project Shell has scrapped this year in China. Just two months ago, Shell, along with ExxonMobil and Russia’s Gazprom, pulled out of the west-east natural gas pipeline project after failing to reach commercial terms with Chinese companies.

Liu said it comes as no surprise that Shell is adjusting its global strategy following a management reshuffle earlier this year.

(China Daily September 30, 2004)