Primeline Energy Holdings Inc. has completed the site survey of the proposed exploration well locations in the Lishui gas play. This survey finalizes all preparatory work required before drilling the prospects identified by the recent 3D seismic program.
Primeline is ready to drill immediately once a rig is available on acceptable terms. The company is continuing its discussions with China National Offshore Oil Corporation (CNOOC) and drilling contractors in order to secure a rig for the selected exploration well locations.
Primeline and CNOOC have also now completed the detailed engineering and costings element of the feasibility study for the stand-alone development of the existing Lishui 36-1 gas discovery. No final conclusion has yet been reached with regard to the feasibility of development of the existing discovery because Primeline and CNOOC are still continuing their discussions with the Wenzhou Municipality Authority and the Zhejiang Provincial Government with regard to a take-or-pay gas sale contract. Those discussions have, however, been influenced by recent developments in the rapidly changing natural gas market in China.
Historically, natural gas has not been a major fuel in China, but its share in the country's energy mix is now rapidly increasing. Rapid development of the natural gas industry is now one of China's strategic policies to resolve its acute energy shortage and to achieve its target for pollution reduction. Part of this strategy is to encourage the transportation of gas from West China and other countries around China, including Russia and Central Asia, where there are significant resources, to East China where demand is highest and the energy shortage is most acute.
China's first major West-East pipeline was completed in 2004 and now carries approximately 12 bcm of gas per annum from the Tarim Basin along the 4,000-kilometer pipeline which terminates at Shanghai. There were initial concerns that there would be insufficient demand for the gas, but now demand exceeds supply and prices have recently been increased.
In order to respond to the increasing demand, there are now three new West to East pipelines planned for the near future, two of which will be able to supply gas to Zhejiang Province.
In the past, the Chinese Government has held state-set gas prices below international LNG market levels but strong demand for gas, coupled with pollution targets, has meant that it has been forced to obtain supplies from foreign sources at market prices. As a result, there has been significant upward pressure on prices. The Chinese Government has recently announced increases in price for all major gas pipelines which are getting closer to international LNG price. China is currently buying LNG on the spot market, and CNPC has recently reported signing a long term LNG supply contract at a price well above the current North American gas price.
Primeline believes that these recent developments are indicative of a maturing gas market with a more market-driven pricing system, which will benefit the development of Block 25/34 in the long term. It is also clear that a gas grid will be established in East China. The company and CNOOC are continuing with the negotiation of a gas sale contract with Wenzhou Authorities while allowing the effect of the recent market developments to be assessed. The company and CNOOC are committed to securing a gas sale agreement on terms which will justify proceeding with development of the existing Lishui 36-1 discovery. Primeline believes the nearby prospects and remainder of the block should underpin the long term success of the project.
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