December 6, 2013 / 8:30 AM / 6 years ago

Chevron's $6.4 billion China gas project pushed back again: sources

BEIJING (Reuters) - A $6.4 billion gas project being built by Chevron CVN.X in China is facing further delays due to disagreements with partner PetroChina (0857.HK) over how to develop the technically tricky fields, three industry sources said.

A gas purifying plant is seen at Sinopec's Puguang gas field in Dazhou, Sichuan province, in this handout picture taken August 29, 2009 and made available to Reuters on December 6, 2013. REUTERS/Zheng Qiang/Sinopec/Handout via Reuters

The Chuandongbei project, the U.S. firm’s largest investment in China, is now not expected to deliver first gas until the second half of 2014, nearly 7 years after the firms clinched a 30-year deal to produce 7.6 billion cubic meters of gas a year.

The latest setback follows a series of delays for Chuandongbei, which Chevron has described as one of its larger capital projects for 2013. PetroChina initially expected first gas to be delivered in 2010, while its parent CNPC forecast just four months ago that production would start by end-2013.

China, the world’s top energy user, but the fourth-largest consumer of gas, is racing to unlock supplies of the cleaner-burning fuel by boosting imports and domestic exploration.

“There are some discrepancies over how to develop the fields between PetroChina and Chevron,” said a Beijing-based industry official with knowledge of the project, a 2,000 square-kilometer block in Sichuan basin in southwest China.

Chevron is the operator of the project and holds a 49 percent stake. PetroChina holds the rest.

The Chinese government had now suspended its approval for the development plan for the second stage of the three-stage Chuandongbei project, to encourage the companies to focus on delivering the first phase, the sources said.

Chuandongbei is a sour gas development. The natural gas contains a high level of hydrogen sulphide.

“The complexity of the project, being a high-pressure, high sulphur development that means higher operational risk and higher standards for technical processes, also contributed to the delays,” said a second industry official.

As the only international oil firm developing high-sulphur gas in China, Chevron has imposed stringent safety standards, sources said, especially after a deadly disaster in 2003 in the same region that forced the then-head of CNPC to quit.

A blowout in 2003 at a gas well in Chongqing municipality owned by CNPC turned 25 sq km (10 sq miles) of farmland into a lethal zone, killing 243 people and poisoning thousands as they slept or scrambled to escape a toxic cloud of hydrogen sulphide.

However, a similar sour gas development in the same geological area, the $10 billion Puguang project developed by PetroChina’s domestic rival Sinopec Corp (0386.HK), took 32 months from start of construction to first gas in 2010. It has a designed annual capacity of 12 bcm.

“Sinopec being the sole owner of the project had a much stronger sense of execution,” said a third industry official involved in the Puguang development. “It had top attention from Sinopec management, which pooled the best design and construction teams to build it.”

PetroChina declined comment on the project start-up date.

Chevron said the company has not yet announced a first-gas date. Chevron “continues to advance the construction of the first natural gas processing plant and development of the Luojiazhai and Gunziping natural gas fields for the Chuandongbei project,” a spokesman said by email.

The plant and the two fields make up the first stage of the project. Chevron said on its website in April that it expected the plant, which is designed for maximum production of about 2.7 bcm a year to be “mechanically complete” by end-2013.

The full development will include two sour gas processing plants and five natural gas fields with gathering systems and tie-ins to the plants. An exploration well is planned for the third quarter of 2013, Chevron said on its website.

The project, in the northeastern part of Sichuan province, has proven reserves of 176 billion cubic meters, the two companies have said.

Chevron is an experienced sour gas developer, and has partnered with PetroChina to develop gas in Australia. It won the deal in December 2007, beating rival bidders Royal Dutch Shell (RDSa.L) and Total (TOTF.PA), partly because it pledged swifter development, sources said.

By last February, Chuandongbei had cost 12.6 billion yuan ($2.1 billion), local media reported. The project is Chevron’s largest upstream investment in China, where it also has a much smaller offshore portfolio. ($1 = 6.0913 Chinese yuan)

Editing by Richard Pullin

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