BP favourite for long-awaited China gas contract, but NWS could still sneak in: Report

As one of the Chinese energy sector's longest and hottest competitions draws to a close, the contestant favoured to win a multi-billion dollar gas supply contract also stands to lose the most.

Industry analysts tip BP Plc to hit the jackpot: a 20-year deal worth up to $500 million annually to supply gas to China's south.

But if it fails, the Anglo-American oil giant would be saddled with a massive gas field in Indonesia that has swallowed hundreds of millions of dollars in investment but lacks a market.

They said BP's ace in the hole is that it appears most willing of the three bidders to part with a substantial stake in its Tangguh gasfield -- a big plus for China as it shops for high-growth upstream assets beyond its borders.

But Australia LNG Pty Ltd, which is pushing its North West Shelf project operated by Woodside Petroleum, could sneak in with a supply bid that analysts deem more stable, crucial to a country that imports a third of its energy needs.

"You're offsetting a sovereign risk issue on Tangguh that would be a lot higher than the North West shelf project," said Mario Traviati, Merrill Lynch's regional oil analyst was quoted by Reuters.

After months of agonising and pleas from such luminaries as Australian Prime Minister John Howard and Indonesian President Megawati Sukarnoputri, China is expected to announce the winner this month, analysts said.

The country's third largest oil firm, the China National Offshore Oil Corp, parent of Hong Kong-listed CNOOC Ltd, will award the supply contract.

"China's a big-growth LNG market so everybody wants them in their projects and they're prepared to give away quite a lot," said Scott Weaver, ING Financial Markets' regional analyst. "A lot of these companies are bending over backwards to get CNOOC."

BP is also a minor partner in Australia LNG, with Royal Dutch/Shell, ChevronTexaco Corp, BHP Billiton and others. But BP is throwing its weight behind the Tangguh project of which it is the operator.

The third bid is by Qatar's Ras Laffan Co, which involves ExxonMobil, analysts said.

If BP's Tangguh bid falls through, it would trail Shell and ExxonMobil in a ballooning gas market. China wants to boost gas usage to eight per cent of its energy mix by 2010 from three per cent to reduce reliance on dirty coal and costly oil.

BP earlier opted out of a massive cross-country gas pipeline to focus its efforts on the LNG terminal deal. Shell and ExxonMobil each secured 15 per cent stakes in the pipeline.

Now BP wants to supply the required three million tonnes of gas per year. The Tangguh field boasts 14.4 trillion cubic feet of proven reserves.

On price, BP holds the upper hand since its gas is up to 12 per cent cheaper than Australia LNG, analysts said.

But there's more at stake than shipping and other costs. China, a net oil importer since 1993 without strategic reserves, also has to consider possible disruptions to energy supply.

"Providing the Australian consortium with a share of the contract also ensures CNOOC has security of supply, just in case the Tangguh gas field is not up and running to meet the December 2005 deadline," HSBC oil analyst Gordon Kwan wrote.

Australia LNG has three production trains which supply seven million tonnes a year to Japan, a stronger track record than the untested Tangguh, analysts said.

In mid-2001, Exxon was forced to halt output in Aceh, then torn apart by separatist violence. Some analysts said that might prompt China to split the contract between Australia LNG and BP.

But some industry experts are putting their money on BP, which has already secured 30 per cent of a $616 million terminal in Guangdong for receiving the gas, because of the sheer size of the Tangguh field.

CNOOC, which became Indonesia's largest offshore producer after it bought the upstream assets of Spain's Repsol-YPF this year, said it wants a significant stake in any supplying fields.

Buying into Tangguh could boost CNOOC's reserves more than 25 per cent without any exploration risks, said HSBC's Kwan. CNOOC could also pick up prime assets that would leap in value after it secures a market in China, others said.

"Right now it's static gas, no market and little value. If you buy into the project on a stranded gas value basis and then write a contract, the value rises dramatically," Traviati said.

The giant Tangguh field could also supply future Chinese LNG terminals, starting with one in southern Fujian that will have a capacity of 2.5 million tonnes in 2005 or 2006, analysts said.

For now, all anyone can do is wait.

"We're all just awaiting Beijing's decision. We've no way of knowing," said Zhang Jianning, BP's government affairs executive.(*)