Chevron to Develop PetroChina's Luojiazhai Gas Field

BEIJING, (Dow Jones Newswires), Aug 06, 2007 (Dow Jones Commodities News)

U.S. oil major Chevron Corp. (CVX) has successfully bid for the right to help develop PetroChina Co's (PTR) Luojiazhai sour gas field in southwestern China's Sichuan province, people familiar with the situation said Monday.

Chevron was chosen by PetroChina ahead of rivals Statoil ASA (STO) of Norway, France's Total S.A. (TOT) and Anglo-Dutch oil giant Royal Dutch Shell PLC (RDSB), the people said, on condition of anonymity.

It marks a rare inroad by a foreign company into China's onshore oil and natural gas production business, which is tightly controlled by PetroChina and its main domestic rival China Petroleum & Chemical Corp. (SNP), known as Sinopec.

China's desire to boost natural gas output and master advanced drilling technology has led it to offer tenders in Luojiazhai and 12 blocks in the Tarim Basin in northwestern China's Xinjiang region to foreign companies.

Isikeli Taureka, Chevron's China manager, said he couldn't comment at this stage about his company's bid for the Luojiazhai project. PetroChina spokesman Zhang Anping declined to comment.

Luojiazhai is known for its harsh, mountainous terrain. Several serious production accidents have occurred there in the past few years.

In December 2003, a massive blowout occurred at a Luojiazhai gas well, resulting in the leakage of hydrogen sulfide and killing 243 and injuring more than 2,000 nearby residents and workers.

Gas also leaked from the No. 2 Luojia well in the gas field in March 2006, forcing the evacuation of thousands of people.

PetroChina - the largest oil and natural gas producer in China by output - issued a tender for the development of the Luojiazhai field in December last year.

Luojiazhai has proved reserves of 58.11 billion cubic meters and a sulfur content of between 7.13% and 10.49%, Ma Xinhua, vice-president of PetroChina's exploration and production company, told an industry forum in September last year. Any field with a sulfur content of more than 2% is classified as high sulfur.

A report by Upstream in June said the close proximity of the Luojiazhai field to densely populated areas had partly put off potential bidders.

This led PetroChina to widen the tender to include the Tieshanpo and Dukouhe gas fields, which have combined reserves of 73.30 billion cubic meters, and sulfur contents of 14.19% and 15.27% respectively.

Technical, Population Issues

PetroChina estimates that there are an average of 89 households living within 500 meters of each well drilled at its high-sulfur gas fields in Sichuan.

According to Ma, PetroChina had put into development a total of 130 gas fields nationwide by September last year, all of which classified as low or mid-sulfur with the exception of the minor Zhongba gas field in the Sichuan Basin, which was commissioned in 1973.

PetroChina's lack of expertise in sour gas, particularly anticorrosion and re-injection technology, have stalled development of least two more high-sulfur fields in the Sichuan Basin - Jinzhuping and Gunziping.

In anticipation of the development of its high-sulfur gas fields, PetroChina is building three purification plants for high-sulfur gas in Sichuan with a capacity of 24 million cubic meters a day.

Sichuan is the largest gas producing region in China. While the vast majority of its natural gas reserves are classified as low sulfur, around 12% are considered high sulfur.

The province is home to Sinopec's massive Puguang gas field, which has proven natural gas reserves of about 356 billion cubic meters.

Luojiazhai will be PetroChina's third natural gas field jointly developed with a foreign company.

Last year, it signed a contract with Total for the joint exploration and production of natural gas in the Sulige gas field in the Ordos Basin in northern China's Inner Mongolia Region.

PetroChina has also signed an agreement with Royal Dutch Shell to jointly explore the Changbei natural gas field in the Ordos basin. Commercial production has begun, the two companies said in March.

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