Sinopec Close to Finalizing Deal with Shell & Unocal

Sinopec said it is in the final stages of an agreement with Shell and Unocal to develop the Xihu Trough located in the East China Sea. The parties have hammered out most of the major hurdles in the negotiation process and expect to sign a production sharing contract as early as March. The negotiations took longer due to disagreements over farm-in compensation. The deal was scheduled to be concluded last summer, but the parties could not agree on the value of the 80 billion cubic meters of gas reserves Chinese explorers had proven in the main Chunxiao fields before Shell and Unocal farmed into the project. The companies agreed that Shell and Unocal will pay a lump-sum for an agreed reserve base which is lower than Sinopec's assessment, however, they will top-up if there is a rise in further evaluations.

The PSC includes three exploration and two development blocks covering a total of 20,000 square kilometers in the Xihu Trough, one of China's largest gas fields located approximately 400 kilometers east of Shanghai. The first phase of development is estimated to cost $1 billion and would be carried out on the Chunxiao gas field. It is scheduled to begin producing in early 2005.

Sinopec and CNOOC will each have a 30% stake in the project and Shell and Unocal will each hold 20%.