Fortune Oil Completes Pipeline Joint Venture with CNPC

Earlier this year, Fortune Oil announced that it had agreed with Beijing Huayou Gas Corporation Ltd., a subsidiary of China National Petroleum Corporation ('CNPC') to take an 80 percent. share in a joint venture which will initially own and operate four natural gas pipelines. The agreement was subject to due diligence and asset valuations.

Fortune Oil is pleased to announce that the final terms of the new joint venture, known as the Beijing Fortune Huiyuan Gas Company Limited ('BFHGC'), have now been agreed and a business license for the joint venture has been issued. The participants in BFHGC are Fortune Gas Development (80 percent.), a wholly-owned subsidiary of Fortune Oil, and Beijing Huiluanda Economic & Trade Company, an affiliate of CNPC, which owns the remaining 20 percent. The agreement envisages the joint venture lasting 30 years.

The creation of the joint venture will pave the way for the introduction of foreign capital and expertise to develop the pipeline assets, as well as providing tax incentives. There is considerable scope for the business to grow through appropriate add-on investment, as demand for natural gas builds up in the region. Growth of BFHGC's business will be mainly driven by increasing capacity utilization and by extending the existing infrastructure.

Bruce McGowan, Executive Vice Chairman of Fortune Oil, commented: 'The completion of the natural gas joint venture is a highly significant step. It neatly complements our existing investments in energy-related infrastructure in China. Most commentators are predicting that China's economy is set for a sustained period of above-average growth. With the switch to natural gas by industrial and private consumers also expected to gather pace over the coming years, this is exactly the right area in which to invest.'

BFHGC has acquired majority stakes in three spur natural gas pipelines which branch off the main Shaanxi-Beijing trunk-line, and is in the process of completing the purchase of a reticulation system in Shuozhou. It is intended that further investment will be made in new networks along the routes of the existing Shaanxi-Beijing trunk-line and the second parallel Shaanxi-Beijing trunk-line, which should be completed in 2005. The effect of the new trunk-line will be to increase capacity from a current level of 3.2 billion cubic meters per year to over 15 billion cubic meters per year.

Joint venture subsidiaries of BFHGC supply natural gas drawn from the Shaanxi-Beijing trunk-line through its spur and reticulation pipelines to wholesale and retail customers under contract. Chinese energy policy has hitherto concentrated on supplying natural gas to Beijing. However, demand along the whole length of the pipeline is growing rapidly. This is because China is seeking to reduce overall industrial and consumer dependence on coal through the increased use of natural gas, which brings obvious environmental benefits. Current customers of BFHGC's pipeline assets include the Jiaming porcelain factory, the largest of its kind in China, and the Engelhard kaolin factory in Pinglu.

The total investment required for Fortune Oil's 80 percent interest in BFHGC is £4.3 million, which includes the repayment of shareholder loans and financing of the acquisition of the reticulation assets in Shuozhou. The consideration of £1.8 million will be paid from cash resources, with the balance of financing being derived from non-recourse bank debt. Fortune Oil will also have the right to appoint five of the seven directors of BFHGC. Li Ching, the Chief Executive of Fortune Oil, has been appointed Chairman of BFHGC. Based upon unaudited management accounts the value of the assets currently owned by BFHGC as at 31 October 2003 is Rmb10.3m (£0.7m).