Shell Opens Door in China

Shell wrapped up a multi-billion dollar deal to explore and develop a vast natural gas field in the East China sea yesterday, confirming its leading position among foreign energy corporations seeking business in China's rapidly growing market.

The Anglo-Dutch company is also poised to expand into other sectors later this year, amid expectations that it will soon become the first western firm to win state approval for a chain of petrol stations in the world's most populous nation.

Amid a surge in trade and investment between Britain and China, the significance of yesterday's deal was underlined by the setting for the signing ceremony, the Great Hall of the People in Beijing, where Tony Blair attended a similar event last month to finalise a port development contract for P&O.

Under the deal, Shell and another foreign firm, Unocal, will each take a 20% stake in a consortium to exploit five sections of the vast Xihu Trough gas field, about 400km off the coast of Shanghai.

Their domestic partners, CNOOC - the main offshore oil producer in China - and Sinopec - the largest oil refiner - will each hold a 30% share in the project, reported to be worth $1bn (£630m) in the initial stages, rising to $10bn.

Once the undersea pipe is completed, the field is expected to go on line in 2005. Within two years of the start of operations, the consortium says it will be pumping 2.5bn cubic metres of natural gas a year into the densely populated and highly industrialised Yangtze river delta.

China is keen to harness new sources of energy to maintain the pace of the country's spectacular economic growth, much of which has been focused on the area around Shanghai. The government wants to expand the use of natural gas, which now accounts for only 2% of the country's power needs. By 2010, this proportion is expected to triple.

Along with the expected doubling of oil imports over the next decade, this creates huge business opportunities for western firms, who have taken major stakes in their Chinese counterparts. Having secured the latest deal after just a year of negotiations - short by Chinese standards - Shell is seen as being well ahead of its main rivals, BP and Exxon.

A Shell spokeswoman said the deal to exploit the 22,000 square mile Xihu Trough field was hugely important for the group. "China is one of the biggest markets in the world for natural gas and growing and it will require a number of large sources to satisfy it. This deal ensures we shall have access to that market."

The company's position looks likely to strengthen further with a move into the retail market. According to its domestic partner Sinopec, the government has granted preliminary approval for Shell to set up a three-year trial of 500 petrol stations in Jiangsu province.

If confirmed, the breakthrough would put Shell in a enviable position to cash in on China's promise to the World Trade Organisation in 2001 that it would open up its retail sector within three years. The number of cars in China has doubled in the past three years to pass the 10m mark. Double-digit growth in the number of vehicles on the roads is expected to continue until the end of the decade, which will make the petrol business a lot more attractive.

But not everything is going Shell's way in China. The firm's hopes to secure a stake in the country's biggest energy infrastructure project - the $18bn, 4,000km gas pipeline from Xinjiang in the east to Shanghai in the west - hit a snag earlier this month, apparently over the level of profit guarantees.