Shell's $4.3 Billion JV Will Be
China's Biggest Foreign Investment

Another walloping bit of validation that rumors of the old economy's death have been vastly exaggerated: Royal Dutch Shell (www.shell.com) is putting the finishing touches on a petrochemical joint venture in China that will involve a capital investment of US$4.3 billion dollars.

The project will represent the largest foreign investment ever in China. The JV will center on an ethylene plant in Huizhou in the Guangdong province in south China.

The project, which will pair Shell with the China National Offshore Oil Corp. (CNOOC at www.coogc.com) as 50/50 partners, may also represent some sort of record for the duration of its negotiations. Shell and the Chinese government had been discussing the venture for 12 years before it finally came to fruition.

Even so, Shell and CNOOC officials are saying very little publicly about the project.

A Shell official has only allowed, "We have reached agreement over outstanding issues regarding our negotiations [and] are now finalizing the contract's details. We hope we are in a position to sign a joint venture contract around the end of October."

Project Part of China's
Drive for Energy Self-Sufficiency

In truth, the agreement's finalization seems a dead-on lock. The Chinese government gave the project the official go-ahead in 1998, when Shell and CNOOC signed a framework agreement in the Hague, with then Chinese Premier Li Peng in attendance. With the Shell CNOOC general agreement, the project apparently now only lacks the requisite dotting of the "i's" and the crossing of the "t's."

That the government is backing the project is no surprise. With the nation's heavy reliance on imported petrochemicals, the government is pushing to develop plants that would bolster China's energy self-sufficiency. If the Shell-CNOOC deal gets the expected rubberstamp OK, the plant in Huizhou would go online in 2005, according to sources close to the project.

A refinery was also part of the original design that Shell at one point proposed during its marathon negotiations with the Chinese government. However, a CNOOC official told Reuters, "Refining margins were still very poor in the region and also in China, as China has linked domestic prices with the Asian market. Neither party is ready to invest in refinery now."

The framework joint venture agreement between Shell and CNOOC, however, does allow for a refinery to be developed at some later date.

Major Consortia Bidding on Project Management

Unsurprisingly, a host of big players are lining up to get a slice of this project's massive action. Shell and CNOOC have reportedly issued invitations to two pre-qualified consortia to bid on the venture's project management contract.

One of those consortia is comprised of U.S.-based Bechtel Co., Foster Wheeler and Sinopec Engineering Institute. The second consortium is made up of Fluor Daniel, Parsons Energy & Chemical Group and China National Chemical Engineering Corp.

The $4.3 billion JV is only one part of Shell's aggressiveness within the Chinese market. The company is expected to invest another $1 billion in the stock offers of two major Chinese oil companies, CNOOC and Sinopec.

Shell's buy-in on the CNOOC IPO could prove to be particularly significant. It could give the company a significant toehold in the lucrative but decidedly protected Chinese retail market.