4,500 Km Chinese Pipeline To Seek Domestic Funding

A joint venture to build a giant 4,000-km natural gas pipeline across China is likely to tap the domestic debt market to raise the majority of funds for it, a top financial adviser to the project said yesterday.

Construction of the pipeline from the northwest region of Xinjiang to the eastern city of Shanghai is expected to cost $5.2 billion, 65 per cent of which would come from debt, said Philip Crotty, head of global corporate finance for Asia with Deutsche Bank, the financial adviser for the project.

"Raising the debt's going to be an interesting exercise but I don't expect it to be a big challenge," Crotty told Reuters in a telephone interview.

The project aims eventually to pipe 12 billion cubic metres of gas a year for sale in the Shanghai region. Since revenue would be in China's renminbi, or yuan, currency, it would make sense to raise debt domestically, Crotty said.

"It is likely the large majority will be in RMB," he said. "The debt market is pretty liquid right now ... we could see major Chinese banks playing a major role in putting this debt package together."

On Thursday, PetroChina signed an agreement to set up joint ventures with a group of foreign oil giants - including Royal Dutch/Shell, ExxonMobil and Russia's Gazprom - to build and operate the pipeline and develop Xinjiang gas fields.

China's Sinopec also has a five per cent stake in the project.

The pipeline debt raised would be guaranteed on a pro rata basis, meaning PetroChina would guarantee 50 per cent, the foreign partners 15 per cent each, and Sinopec five per cent, Crotty said.

The project also involves upstream development - finding and extracting the gas - with a cost of about $3.3 billion that will be financed through equity, probably from the companies' capital expense budgets, Crotty said.

The companies would hammer out specifics of the joint ventures over the next three to six months, Crotty said.

"Many of the fundamental stumbling blocks have been discussed at length. I don't think there is anything else out there that will come out and undermine the deal," Crotty said.

PetroChina Co and foreign partners will sell 60 per cent of the gas it sends to Shanghai to industrial users by 2005 when demand is expected to reach 12 billion cubic metres, China Daily reported, without citing anyone.

While PetroChina has set an indicative price of 1.29 yuan cents) per cubic metre of Xinjiang gas, users in Shanghai may have to pay 1.35 yuan for the fuel, the report said.

Another $9 billion is needed to build a distribution network in eastern China to send gas to factories and households, the report said, without citing anyone.

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