Sinopec to Join Chevron's $6-8B Gendalo-Gehem Gas Project

(Dow Jones Newswires), Dec. 2, 2010

China Petrochemical has struck a deal with Chevron to join the $6 billion-plus Gendalo-Gehem deepwater natural gas project off Indonesia's East Kalimantan province, a person familiar with the matter said Thursday.

The company, known as Sinopec Group, signed an agreement with Chevron in Singapore Tuesday to take an 18% stake in each of the Rapak, Ganal and Makassar Strait deepsea blocks containing the gas discoveries that will underpin the proposed project, said the person, without disclosing financial terms.

It marks the latest push by Chinese companies to secure overseas energy assets, and comes days after Cnooc's (CEO) joint venture in Argentina paid $7.06 billion to take full control of the country's second-biggest oil and gas producer from BP.

Natural gas projects are increasingly targeted as China accelerates efforts to reduce reliance on coal and foreign oil, which have made cities like Shanghai among the smoggiest in the world.

State companies have invested heavily in building up infrastructure in China to funnel in foreign gas, including pipelines from Central and Southeast Asia and multibillion dollar terminals to receive liquefied natural gas ships along the eastern coast.

The International Energy Agency predicts China's gas consumption will more than quadruple in the 2008-2035 period. Much of this demand will be met by overseas projects--the IEA forecasts China's annual natural gas imports will grow from around 176 billion cubic feet in 2008 to more than 7 trillion cubic feet in 2035, accounting for 40% of the growth in inter-regional trade.

Sinopec has lagged domestic peers PetroChina and Cnooc in buying overseas gas assets, partly because it has been slower to kick off construction of LNG receiving terminals.

As Asia's largest refiner, Sinopec's earnings are also more exposed to swings in oil prices and up to now it has concentrated on doing deals that can reduce its crude import costs.

Sinopec Group is the state-owned parent of Hong Kong and Shanghai-listed China Petroleum & Chemical (SNP), which also American Depository Receipts traded in New York. It declined to comment on the deal in Indonesia when contacted by Dow Jones Newswires.

San Ramon, Calif.-based Chevron said in November last year it was seeking partners for the Gendalo-Gehem project in order to mitigate risk in the venture, and hoped to have an agreement in place within a year.

Chevron, one of the largest oil and gas producers in Indonesia, describes Gendalo-Gehem as one of its "major capital projects", but has yet to carry out engineering and design work.

This means first gas output isn't likely before the second half of the decade even if there are no delays to engineering work, construction, or the approvals process with the Indonesian government.

Gendalo-Gehem aims to produce around 1.1 billion cubic feet of natural gas and 31,000 barrels of condensate--a petroleum liquid--a day at its peak, according to Chevron's 2009 annual report.

The deal will help fill a gap in Sinopec's technical armory, as the Gendalo-Gehem project will tap gas deposits beneath 6,000 feet of water. Much of the Chinese company's current oil and gas output is from shallow-water fields.

The person, who didn't wish to be named, said the farm-in agreement requires regulatory approvals in Indonesia and China.

Chevron's stake in the Rapak and Ganal blocks will fall to 62% when the deal is completed.

Italy's Eni owns 20% of both licenses, while the Indonesian government has the right to take a 10% interest, likely through state-owned oil and gas producer Pertamina.

In addition, Chevron's interest in the Makassar Strait block will fall to 72% when the deal with Sinopec closes. Pertamina has a 10% stake in this block.

Copyright (c) 2010 Dow Jones & Company, Inc.