CHEVRON'S SW CHINA GAS PARTNERSHIP MOVING FORWARD, BUT

C O N F I D E N T I A L SECTION 01 OF 03 CHENGDU 000236

SIPDIS

DEPT FOR EAP/CM

E.O. 12958: DECL: 10/27/2019
TAGS: ENRG ETRD EINV PGOV SOCI KNNP CH
SUBJECT: CHEVRON'S SW CHINA GAS PARTNERSHIP MOVING FORWARD, BUT
FACING BUREAUCRATIC HURDLES

CHENGDU 00000236 001.2 OF 003


CLASSIFIED BY: David E. Brown, Consul General, U.S. Consulate
General Chengdu.
REASON: 1.4 (d)

1. (C) Summary: The first stage of Chevron's upstream gas
development project on the Sichuan-Chongqing border is poised to
take a significant step forward when it receives National
Development and Reform Commission (NDRC) approval in the coming
weeks. Chevron and PetroChina signed a multi-year production
sharing agreement (PSA) in 2007 to jointly develop sour gas,
natural gas with high levels of hydrogen sulfide (H2S),after
two accidents demonstrated that PetroChina needed a foreign
partner to safely develop the 176 billion cubic meters (bcm) of
proven gas reserves. The partnership with PetroChina and the
development work are progressing well, but an extensive set of
approvals and reviews from the local to the national level have
delayed some development targets. Chevron believes its
partnership in this SW China gas project will open doors to
future opportunities in China and in third countries. End
Summary.



Chevron Enters Southwest China After Major Gas Accidents

-------------- --------------




2. (SBU) Chevron inked a PSA with PetroChina in December 2007
following PetroChina's two major accidents as operator of the
Chuangdongbei (CDB) gas field, located near Dazhou, Sichuan. A
gas leak at one of the wells in 2003 killed 243 people and may
have injured as many as 9,000 more, General Manager of Chevron's
Chuandongbei project Steven Haile told Consul General recently.
Following a second gas leak in 2006 that resulted in the
evacuation of 7,000 people living near the development, the
Chinese government mandated that PetroChina bring in a foreign
partner with experience in developing sour gas. None of the
wells drilled prior to Chevron's participation in the CDB
project entered full production or supplied gas to downstream
customers.




3. (SBU) Chevron holds a 49 percent stake in the gas field
development PSA, and in August 2008 officially became the CDB
project operator. Due to the previous accidents and ongoing
safety concerns, Chevron delayed taking on full operational
responsibility for the field until it could ensure that existing
wells had sufficient safety upgrades to prevent any additional
accidents. The PSA stipulates that Chevron will transfer gas
production technology and train PetroChina employees in the safe
development and operation of sour gas fields. Chevron may hand
over full operation of the CDB project to PetroChina within 10
years, based on milestones in defined in the PSA, PetroChina's
"demonstrated capability" to operate the field, and financial
triggers.



Why Is Sour Gas Significant?

--------------




4. (SBU) The CDB project holds 176 bcm of proven gas reserves,
but the gas has a high fraction of H2S, ranging from 12-16
percent, which adds complexity to the development and production
process. Sour gas requires specialized purification plants to
remove the H2S and convert it to sulfur. To prevent H2S
corrosion, transport and purification equipment require the use
of specific metal alloys. Chevron currently needs to import
some of this pipe because no suitable product is available in
China. Haile said that Chevron probably won the bid to operate
the field because of the company's previous experience working
with sour gas in places like Kazakhstan.




5. (SBU) Chevron plans to build two sour gas purification plants
that will have the capacity to process 3,000 tons of sulfur per
day. The sulfur separated from the gas can be sold in the
commercial market. Carbon dioxide and other non-sulfur, waste
components of the gas will be re-injected into the ground or
burned and vented into the atmosphere. Chevron will be buying
carbon credits to offset CO2 venting from the gas treatment
plants, Haile said, effectively making the facilities "zero
(carbon) output."



CHENGDU 00000236 002.2 OF 003



Development and Resident Relocation Plans

--------------




6. (SBU) A total of eight Chevron employees moved to Chengdu in
February 2008, but the staff expanded rapidly to over 120
expatriate families in September 2009. The majority of the
expatriate staff is currently based in Chengdu. Field work to
date has required a comparatively small number of staff and has
focused on safety upgrades to existing wells. Chevron plans to
salvage eight of the roughly 55 wells PetroChina drilled prior
to 2007. Haile said that eight additional wells will be drilled
in the first stage of the CDB project. A second stage will
include the construction of eight new wells and one "salvage
well" rehabilitated from those drilled before 2007. Haile plans
to have both the first and second stages of the development
online by 2013-2014. The third stage of the project will
follow, but he did not say when this stage might enter
production.




7. (SBU) Haile said that the first stage of the development will
require the resettlement of approximately 4,500 - 5,000 local
residents living near the CDB project. Chevron, together with
PetroChina and the local governments, has already provided
temporary resettlement for some residents who lived in close
proximity to the existing wells. PetroChina and Chevron
facilitated these moves to ensure compliance with Chevron's
safety guidelines and operating procedures. Chevron officials
said they will provide permanent resettlements in accordance
with international standards, and the company is working to
ensure that resettled residents have the ability to make a
living after the move. Chevron is also planning the gas field
development with the goal of minimizing the number of families
that will need to move. The town of Nanba was the planned
original location for the stage one gas treatment plant, but
this area has a relatively large population. Chevron elected to
relocate the plant to an area that has only about 4,000 people,
limiting the number of required relocations.



Lengthy Approvals Delay Work

--------------




8. (C) Haile expressed optimism and confidence about Chevron's
partnership with PetroChina and the overall trajectory of the
project. At the same time, he noted that the number of
approvals needed before drilling and other major activities
commenced had slowed the pace of development. Chevron must
obtain approval from county, provincial, and ultimately
national-level authorities for the overall development plan, the
land use plan, and the environmental impact assessment. The
NDRC is the final level of bureaucratic approval, but Chinese
regulations stipulate that Chevron needs approvals for each of
the three planned stages of the project. Haile said his company
had hoped they would have NDRC approval for stage one of the CDB
project in late 2008 or early 2009. Due to the number of
bureaucratic entities involved in the process, however, Chevron
is still awaiting NDRC approval of stage one, which he hopes to
have in the near future.




9. (C) In addition to delays caused by the formal review
process, negotiations with PetroChina have also, on occasion,
taken longer than expected. Haile told CG that Chevron seems at
times to struggle with PetroChina over operational processes and
costs. PetroChina has argued in specific cases for less
participation by foreign workers as a way to lower costs. Haile
emphasized that he is willing to seek local suppliers and local
labor whenever possible, but sometimes the right person or part
for the job needed to come from abroad. He also remarked in a
sarcastic manner that if PetroChina were so concerned about the
cost of using properly-trained foreign workers, perhaps
PetroChina could help lower the 58 percent tax Chevron pays for
its expat employees.



Comment: The Foot In The Door

CHENGDU 00000236 003.2 OF 003



--------------




10. (SBU) Haile told CG that he sees Chevron's participation in
the CDB project as part of the company's larger presence in
China. He suggested that the company could use this project as
a way to establish stronger working relations with its Chinese
partner and prove itself to Chinese officials in the NDRC.
Haile implied that successful development and operation of the
CDB project could open the door to stakes in other oil and gas
projects in China, although he did not specify which projects
were of greatest interest. He also agreed with CG's statement
that this partnership might also strengthen Chevron's working
relationship with PetroChina and present opportunities for
cooperation in third countries.
BROWN